December 10, 2007
So what is causing the Indian stockmarkets to rise at such a frenetic pace?
Even though there is consensus over the reasons for this unprecedented Bull Run on the Indian stockmarkets, no one is quite sure why it is happening at the pace at which it is happening.
However, the reasons for the Sensex's stunning rise are many:
1. Major foreign and Indian investors are pouring money by the buckets into the Indian stockmarkets because of the attractive returns they are getting from here. The reason why money has taken flight from some major foreign markets is because growth levels in those economies has stagnated for a while now, making them less attractive. Almost 85 per cent of the foreign investment into India in 2007 has been in the form of equity -? or stock market -- investment.
2. Stellar corporate results from Indian companies have made domestic and foreign institutional investors salivate. And as they buy more of these companies' shares, the entire market soars. Corporate India has a positive growth outlook which is rubbing off on their stocks too.
3. India's market reforms, better regulation, more opening up of the economy and a strong judiciary have added to the market boom.
4. Inflation has been contained, which will add to the nation's growth, making it a very alluring economy.
5. The country's political climate is very stable and there appear to be no threats to the country from any quarter in the near term. And despite the worries of rising oil prices, possible natural calamities or a weak monsoon or even an economic meltdown in the US, India remains a strong economy with all its fundamentals in a robust state.
6. In the long term, Indian markets are being considered as one of the most attractive in the world.
7. The Reserve Bank of India's monetary policy has kept the economy stable and the interest rates are at levels that foreign investors find very appealing.
8. With the US Federal Reserve cutting interest rates in America, investors are looking at markets like India to earn more on their assets.
9. Rising Asian markets, including Hong Kong and Korea, are also helping lift the entire region's markets.
10. Also, the Indian currency -- the rupee -- is strengthening against the US dollar leading to dizzying growth of its stockmarket.
11. And finally, there is this widespread perception that India is the place to be and that is what the global investor is adhering to.
from rediff.com
Monday, December 10, 2007
Thursday, December 6, 2007
Understanding the Sensex and the Nifty
In recent months, the Sensex has created headline after headline as it has marched seemingly unstoppable from 15,000 to 16,000 to 19,000 and, for a brief moment, 20,000.
Even people who don't follow stock markets closely may have a pretty good idea of the Sensex value. But what exactly is the Sensex? And what can indices like the Sensex and Nifty tell you about stock market movements?
What is a stock-market index?
A stock-market index is simply a convenient summary of market prices. There are thousands of stocks whose prices fluctuate up and down every day.
An index helps make sense of this chaos and gives you a single number which tells you how well the market is performing compared with earlier periods. The basic idea is to select a small number of stocks which are considered representative and important and calculate the index based on the prices of those stocks.
These are the two most popular indices for Indian stock markets and are produced by the Bombay Stock Exchange (BSE) and National Stock Exchange (NSE) respectively.
The Sensex which was first calculated in 1986 is based on the market capitalisation (share price times the number of shares outstanding) of 30 important stocks. The actual stocks have changed over the years along with the Indian economy but in general the Sensex represents the stock prices of the largest and most important companies from a variety of sectors. It is updated every 15 seconds during trading hours.
The S&P CNX Nifty is quite similar except that it is based on 50 large stocks, many of which are also represented in the Sensex.
Are there any other indices?
Yes, it is important to understand that the Sensex and the Nifty are just the most popular of many different indices. Both the BSE and the NSE produce several other indices which cover smaller firms and individual sectors.
For example the S&P CNX 500 is a broad-based index which covers 500 firms and therefore gives a broader picture of the stock market as a whole than narrower measures like the Nifty. The BSE-500 is another broad index produced by the BSE. These two indices cover more than 90 per cent of the market capitalisation of all the firms in their respective stock exchanges.
Both exchanges also produce sector-specific indices. For example you have the BSE Auto Index, BSE IT Index, CNX Pharma Index, CNX Bank Index and so on. Both exchanges also have indices which focus on mid-cap and small-cap firms: BSE Mid-Cap, BSE Small-Cap, CNX Midcap etc.
What are the uses of an index?
In addition to their general role as a summary of market conditions, indices are of great use to the financial sector.
They are used to benchmark mutual fund performance; ie to see how a particular fund is performing relative to the broader market.
They are used in creating new financial products called index derivatives (financial products whose value is derived from the level of a particular index).
Also they are used by index funds which invest passively in the stocks of a particular index instead of trading actively.
Look beyond the markets and invest
The bottom line is that the Sensex and Nifty are good starting points but investors need to look beyond them when it comes to understanding market movements.
For example it's possible that when the Sensex is booming, mid-cap firms may be lagging behind.
Or the booming Sensex may be driven by just one particular sector like capital goods while IT may be doing quite poorly. To get a full picture of what's happening, you need to look at a combination of indices.
from rediff.com
Even people who don't follow stock markets closely may have a pretty good idea of the Sensex value. But what exactly is the Sensex? And what can indices like the Sensex and Nifty tell you about stock market movements?
What is a stock-market index?
A stock-market index is simply a convenient summary of market prices. There are thousands of stocks whose prices fluctuate up and down every day.
An index helps make sense of this chaos and gives you a single number which tells you how well the market is performing compared with earlier periods. The basic idea is to select a small number of stocks which are considered representative and important and calculate the index based on the prices of those stocks.
These are the two most popular indices for Indian stock markets and are produced by the Bombay Stock Exchange (BSE) and National Stock Exchange (NSE) respectively.
The Sensex which was first calculated in 1986 is based on the market capitalisation (share price times the number of shares outstanding) of 30 important stocks. The actual stocks have changed over the years along with the Indian economy but in general the Sensex represents the stock prices of the largest and most important companies from a variety of sectors. It is updated every 15 seconds during trading hours.
The S&P CNX Nifty is quite similar except that it is based on 50 large stocks, many of which are also represented in the Sensex.
Are there any other indices?
Yes, it is important to understand that the Sensex and the Nifty are just the most popular of many different indices. Both the BSE and the NSE produce several other indices which cover smaller firms and individual sectors.
For example the S&P CNX 500 is a broad-based index which covers 500 firms and therefore gives a broader picture of the stock market as a whole than narrower measures like the Nifty. The BSE-500 is another broad index produced by the BSE. These two indices cover more than 90 per cent of the market capitalisation of all the firms in their respective stock exchanges.
Both exchanges also produce sector-specific indices. For example you have the BSE Auto Index, BSE IT Index, CNX Pharma Index, CNX Bank Index and so on. Both exchanges also have indices which focus on mid-cap and small-cap firms: BSE Mid-Cap, BSE Small-Cap, CNX Midcap etc.
What are the uses of an index?
In addition to their general role as a summary of market conditions, indices are of great use to the financial sector.
They are used to benchmark mutual fund performance; ie to see how a particular fund is performing relative to the broader market.
They are used in creating new financial products called index derivatives (financial products whose value is derived from the level of a particular index).
Also they are used by index funds which invest passively in the stocks of a particular index instead of trading actively.
Look beyond the markets and invest
The bottom line is that the Sensex and Nifty are good starting points but investors need to look beyond them when it comes to understanding market movements.
For example it's possible that when the Sensex is booming, mid-cap firms may be lagging behind.
Or the booming Sensex may be driven by just one particular sector like capital goods while IT may be doing quite poorly. To get a full picture of what's happening, you need to look at a combination of indices.
from rediff.com
Wednesday, December 5, 2007
Five money-saving shopping tips
Have you already squeezed every last penny out of your budget? Maybe not. Thanks to free market capitalism, we can choose from a wide variety of products at a wide variety of prices pretty much any time we want to buy something.
Unlike investing, saving money on purchases doesn't require any specialized training and is an easy way for anyone to stretch their budget a little farther.
No matter what your income level, you can give yourself more breathing room by becoming a savvy shopper. Here are five tips to help you get started.
Tip 1: Make the Store Your Last Choice
Most people's default response is to go to a store anytime they need something, but that's not the only way to obtain a needed item. Ask yourself these questions:
Can I get it for free?
If you don't need something right away, and you usually don't, it's worth searching on community ad sites like Craigslist or Kijiji, signing up with some local Freecycle groups, and asking around to see if anyone you know is getting rid of whatever you want.
Can I borrow it?
This tactic can be a great money-saver for any item that you use infrequently or will only need to use once. For example, if you only need to use a drill once a year when you change apartments and have to reinstall your curtain rods, you can get by with borrowing a drill from someone else. Many home improvement stores even have tools you can rent. Likewise, instead of spending money on the newest bestseller novel that you will probably only read once, head down to your local library and see if you can borrow the book. (New to budgeting? Check out Six Months To A Better Budget, Get Your Budget In Fighting Shape and The Beauty Of Budgeting.)
Tip 2: Negotiate When Possible - The Indian style
Some prices are set in stone, and it's a waste of time trying to negotiate with someone who won't budge. However, when you think there's some wiggle room, consider these strategies:
Can I negotiate a lower price?
While you probably can't negotiate the price on many items, like new DVDs or a package of gum, there are plenty of situations where you can negotiate, even in a retail store. For example, if an item is cosmetically damaged, a store may be willing to offer a small discount because that blemished items tend to be more difficult to sell. If a salesperson wants you to buy a bunch of extras with a new computer or cell phone plan, ask for a discount - the salesperson they may be allowed to offer discounts in order to close the deal on big-ticket purchases.
Of course, if you're buying an item from a private party, you can always negotiate. Also, you probably already know not to automatically pay the sticker price on a car or house, because negotiation is standard practice on these major purchases and the sticker price is generally higher than the real amount the seller will accept.
Can I barter?
Barter can be difficult because many people are not accustomed to doing it and it's hard to find someone who wants the service or goods you have to offer in exchange for the what another person is selling. If you have some valuable products or services to offer, however, and you're purchasing from a private party, it's worth asking. Even if the other party isn't willing to barter for the entire item, he or she may be willing to at least reduce the price in exchange for an hour of your expertise.
Tip 3: Time Your Purchase
If you wait to purchase something until you really need it, you're likely to pay the sticker price, but with a little advanced planning, you can save big bucks.
Will this item go on sale?
If you want an electronic good, you will probably have to wait patiently after it is introduced - a sale will emerge once a newer model comes out or the regular price will drop as supply increases and demand drops. As new items become more popular, even if they don't officially go on sale, you may be able to get a good deal on eBay. Certain everyday items, like groceries, toiletries and cosmetics, will always go on sale sooner or later, providing an opportunity for you to stock up when your favorite brands are priced at a discount. For anyone who doesn't closely follow the latest fashion trends, clothes are best purchased during end-of-season sales, even if it means you don't get much use out of them until the following year. (To learn more, read Patience Pays For Consumers.)
Might there be a coupon for this item somewhere?
Combine sales with coupons, and you'll save even more. For the internet-savvy, eBay can be a great source of coupons, such as 10 buy-one-get-one-free coupons (abbreviated B1G1 in eBay lingo) of your favorite deodorant. The coupons might cost you $2.50 total including postage, but if you use all 10 of them, your net savings on a $3 stick of deodorant will be at least $27.50 plus tax. If you have time to look through a few pages of content, then sites that offer free printable coupons, like Coupons.com could be a good option for you too.
When shopping online, search for the store's name plus "coupon code" before making a purchase. Many sites will advertise coupon codes to help give consumers a break. Sometimes you'll enter coupon codes to no avail, but sometimes you'll get lucky and get some savings like $5 off shipping fees or 20% off your entire purchase. It's always worth taking a few minutes to look.
Can I get a better price somewhere else?
It's usually a bad idea to buy an item at the first place you see it because it's very likely it is cheaper somewhere else. For expensive purchases where you have a lot to gain by comparing prices, and for situations, like online shopping, where it's extremely easy to compare prices, the savings you'll achieve are worth the extra time and effort.
However, if you don't stand to save much or are likely to waste a lot of time, gas and money by shopping around, don't bother. If you're pressed for time, you can avoid shopping around altogether by making a habit of doing all of your shopping at stores that regularly offer bargain prices, and you'll be confident that you're already getting a good deal.
Tip 4: Substitute
If the item you want to buy doesn't quite fit into your budget, think about similar but less expensive alternatives.
Is there something that doesn't cost as much, but does the job I need it to?
Figuring out the real reason behind a pending purchase can help you brainstorm ways to achieve the same result more affordably. For example, if you're worried about being bored during a long flight, you may want to buy a $125 spare battery for your laptop so you can get some work done.
In this case, your main concern isn't really getting more work done, but rather finding a way to occupy your time. Instead of buying that extra battery, you could use your laptop on the most energy-efficient setting until the battery runs out, and then spend the rest of the flight reading a library book.
Do I really want this?
Wish lists can go a long way toward preventing impulse buying. By keeping a never-ending wish list, a person is less likely to buy items that have not been contemplated for at least a month, which provides sufficient time to decide whether the item is a necessity or just a want.
If the mere prospect of saving money isn't enough incentive, consider the opportunity cost of buying an item. Maybe that new suit or purse isn't worth it when you could use the money toward going on a vacation.
Tip 5: Expand Your Shopping Universe
If you normally head straight to your favorite website, specialty store, or the mall when you need to buy something, consider these other shopping options that can save you a great deal of money:
Is someone personally selling what I need?
Garage sales, moving sales and estate sales tend to offer all types of merchandise at much lower than retail prices. You are most likely to benefit from this type of shopping experience for items that are not necessarily needed right away. For example, goods like canning jars, dishes or a jewelry organizer. This can also apply to more practical goods as well. However, don't expect to find absolutely everything at these sales, but do check them out from time to time to add value to your shopping budget.
Unlike investing, saving money on purchases doesn't require any specialized training and is an easy way for anyone to stretch their budget a little farther.
No matter what your income level, you can give yourself more breathing room by becoming a savvy shopper. Here are five tips to help you get started.
Tip 1: Make the Store Your Last Choice
Most people's default response is to go to a store anytime they need something, but that's not the only way to obtain a needed item. Ask yourself these questions:
Can I get it for free?
If you don't need something right away, and you usually don't, it's worth searching on community ad sites like Craigslist or Kijiji, signing up with some local Freecycle groups, and asking around to see if anyone you know is getting rid of whatever you want.
Can I borrow it?
This tactic can be a great money-saver for any item that you use infrequently or will only need to use once. For example, if you only need to use a drill once a year when you change apartments and have to reinstall your curtain rods, you can get by with borrowing a drill from someone else. Many home improvement stores even have tools you can rent. Likewise, instead of spending money on the newest bestseller novel that you will probably only read once, head down to your local library and see if you can borrow the book. (New to budgeting? Check out Six Months To A Better Budget, Get Your Budget In Fighting Shape and The Beauty Of Budgeting.)
Tip 2: Negotiate When Possible - The Indian style
Some prices are set in stone, and it's a waste of time trying to negotiate with someone who won't budge. However, when you think there's some wiggle room, consider these strategies:
Can I negotiate a lower price?
While you probably can't negotiate the price on many items, like new DVDs or a package of gum, there are plenty of situations where you can negotiate, even in a retail store. For example, if an item is cosmetically damaged, a store may be willing to offer a small discount because that blemished items tend to be more difficult to sell. If a salesperson wants you to buy a bunch of extras with a new computer or cell phone plan, ask for a discount - the salesperson they may be allowed to offer discounts in order to close the deal on big-ticket purchases.
Of course, if you're buying an item from a private party, you can always negotiate. Also, you probably already know not to automatically pay the sticker price on a car or house, because negotiation is standard practice on these major purchases and the sticker price is generally higher than the real amount the seller will accept.
Can I barter?
Barter can be difficult because many people are not accustomed to doing it and it's hard to find someone who wants the service or goods you have to offer in exchange for the what another person is selling. If you have some valuable products or services to offer, however, and you're purchasing from a private party, it's worth asking. Even if the other party isn't willing to barter for the entire item, he or she may be willing to at least reduce the price in exchange for an hour of your expertise.
Tip 3: Time Your Purchase
If you wait to purchase something until you really need it, you're likely to pay the sticker price, but with a little advanced planning, you can save big bucks.
Will this item go on sale?
If you want an electronic good, you will probably have to wait patiently after it is introduced - a sale will emerge once a newer model comes out or the regular price will drop as supply increases and demand drops. As new items become more popular, even if they don't officially go on sale, you may be able to get a good deal on eBay. Certain everyday items, like groceries, toiletries and cosmetics, will always go on sale sooner or later, providing an opportunity for you to stock up when your favorite brands are priced at a discount. For anyone who doesn't closely follow the latest fashion trends, clothes are best purchased during end-of-season sales, even if it means you don't get much use out of them until the following year. (To learn more, read Patience Pays For Consumers.)
Might there be a coupon for this item somewhere?
Combine sales with coupons, and you'll save even more. For the internet-savvy, eBay can be a great source of coupons, such as 10 buy-one-get-one-free coupons (abbreviated B1G1 in eBay lingo) of your favorite deodorant. The coupons might cost you $2.50 total including postage, but if you use all 10 of them, your net savings on a $3 stick of deodorant will be at least $27.50 plus tax. If you have time to look through a few pages of content, then sites that offer free printable coupons, like Coupons.com could be a good option for you too.
When shopping online, search for the store's name plus "coupon code" before making a purchase. Many sites will advertise coupon codes to help give consumers a break. Sometimes you'll enter coupon codes to no avail, but sometimes you'll get lucky and get some savings like $5 off shipping fees or 20% off your entire purchase. It's always worth taking a few minutes to look.
Can I get a better price somewhere else?
It's usually a bad idea to buy an item at the first place you see it because it's very likely it is cheaper somewhere else. For expensive purchases where you have a lot to gain by comparing prices, and for situations, like online shopping, where it's extremely easy to compare prices, the savings you'll achieve are worth the extra time and effort.
However, if you don't stand to save much or are likely to waste a lot of time, gas and money by shopping around, don't bother. If you're pressed for time, you can avoid shopping around altogether by making a habit of doing all of your shopping at stores that regularly offer bargain prices, and you'll be confident that you're already getting a good deal.
Tip 4: Substitute
If the item you want to buy doesn't quite fit into your budget, think about similar but less expensive alternatives.
Is there something that doesn't cost as much, but does the job I need it to?
Figuring out the real reason behind a pending purchase can help you brainstorm ways to achieve the same result more affordably. For example, if you're worried about being bored during a long flight, you may want to buy a $125 spare battery for your laptop so you can get some work done.
In this case, your main concern isn't really getting more work done, but rather finding a way to occupy your time. Instead of buying that extra battery, you could use your laptop on the most energy-efficient setting until the battery runs out, and then spend the rest of the flight reading a library book.
Do I really want this?
Wish lists can go a long way toward preventing impulse buying. By keeping a never-ending wish list, a person is less likely to buy items that have not been contemplated for at least a month, which provides sufficient time to decide whether the item is a necessity or just a want.
If the mere prospect of saving money isn't enough incentive, consider the opportunity cost of buying an item. Maybe that new suit or purse isn't worth it when you could use the money toward going on a vacation.
Tip 5: Expand Your Shopping Universe
If you normally head straight to your favorite website, specialty store, or the mall when you need to buy something, consider these other shopping options that can save you a great deal of money:
Is someone personally selling what I need?
Garage sales, moving sales and estate sales tend to offer all types of merchandise at much lower than retail prices. You are most likely to benefit from this type of shopping experience for items that are not necessarily needed right away. For example, goods like canning jars, dishes or a jewelry organizer. This can also apply to more practical goods as well. However, don't expect to find absolutely everything at these sales, but do check them out from time to time to add value to your shopping budget.
Credit card statement made easy
When was the last time you took a detailed and unhurried look at your credit card statement?
Do you understand every printed detail that appears on your credit card?
Your monthly credit card statement is the best document that will help you understand your monthly spending. Reading and understanding the fine print of your statement, will help you in practicing proper credit card management. It will also help you learn how your credit card works.
What is a credit card statement?
A credit card statement is the monthly billing statement you receive from your credit card issuer. It lists all the transactions done using your credit card, and the total outstanding balance, payment date etc.
Credit card statement essentially has two parts. One is the payment coupon which you detach and enclose with your payments. The second and the most important part of your credit card statement is where your credit activity is listed. We will examine this part in detail below:
Name and address: This is the card holder's name and full address as per the card issuer's records. The only thing you should keep in mind is that, if there is any change of address, you should immediately notify your card issuer/bank in writing and get an acknowledgement for the same.
Reference number: This is the number you will need to quote in case of dispute on any of your charges listed in that particular credit card statement.
Credit card number: Most of the credit cards have a unique 16 digit number assigned to your credit card, usually super-imposed across the credit card. Some credit cards like American Express (AmEx) have 15-digit number. You need to quote this number in your cheque or demand draft while making payments and also for correspondence with the card issuer.
Credit limit: Credit limit is the maximum amount your credit card allows you to borrow, whether as credit against goods purchased or/and cash withdrawn. The card issuing bank can revise credit limit based on your payment track-record. A good payment track record can help you in getting your credit limit increased and vice versa.
Available credit limit: It is the difference between your credit limit and total amount due. If your credit limit is Rs 50,000 and you have spent Rs 1,500, your available credit limit reduces to 48,500.
Cash limit: Cash limit sets the maximum money you can withdraw as cash using your credit card. Your cash limit is a part of your credit limit and so, necessarily has to be lower than your credit limit.
Assume your credit limit is Rs 50,000 and cash limit is Rs 20,000. If you have exhausted your credit limit of Rs 50,000 by making purchases on your credit card, then you cannot withdraw cash using your credit card, even if you have not used your cash limit at all.
Statement date: This is the date on which your bill is generated. This is also the date used to calculate interest rate if you do not pay the full outstanding amount by the payment due date, even though the due date may fall many weeks after the statement date.
Payment due date: This is the date before which your payment (cheque or demand draft) should get credited to the bank. To be more specific, this is the last date by which your payment has to be recorded in your bank's computer. This is not the date your bill has to be postmarked, or even the date it arrives at the company's office. So be sure that your cheque/DD reaches the bank well before the due date so that no late payment fee is levied to you.
Total amount due: This is the total bill amount to be paid -- the total unpaid accumulated amount outstanding in your account, including interest and any other charges like late payment fees, if any.
Minimum amount due: It is the minimum amount required to be paid to keep your account in a good credit standing. This amount is usually 5 per cent to 20 per cent of your total amount due. If you do not pay the minimum amount due by payment due date, it will be considered as a default and levied a late payment fee.
Tip to remember: Even if you pay the minimum amount due, you will be charged interest on the total amount due (including the minimum amount due that you paid). If you do not want to pay interest you have to pay the entire total amount due before payment due date. Even if you have paid 95 per cent of the total amount due before due date but there is still some small amount pending, you will be charged interest for the full total amount due.
Rewards point summary: This is the record of the rewards points you have earned/redeemed till date. The summary usually gives an account of your opening balance and the points or credits earned or redeemed. You should not confuse reward points with credit limit or balance outstanding. Reward points and the method of redemption vary from one credit card to another.
Transaction details: The transaction details will have the date of transaction, place of transaction (where you spent the money) and the transaction amount. This helps you verify the charges credited to your card.
It is important that you check your credit card transaction details regularly. This is the only way you will come to know if some transaction has been fraudulently credited to your card.
from rediff.com
Do you understand every printed detail that appears on your credit card?
Your monthly credit card statement is the best document that will help you understand your monthly spending. Reading and understanding the fine print of your statement, will help you in practicing proper credit card management. It will also help you learn how your credit card works.
What is a credit card statement?
A credit card statement is the monthly billing statement you receive from your credit card issuer. It lists all the transactions done using your credit card, and the total outstanding balance, payment date etc.
Credit card statement essentially has two parts. One is the payment coupon which you detach and enclose with your payments. The second and the most important part of your credit card statement is where your credit activity is listed. We will examine this part in detail below:
Name and address: This is the card holder's name and full address as per the card issuer's records. The only thing you should keep in mind is that, if there is any change of address, you should immediately notify your card issuer/bank in writing and get an acknowledgement for the same.
Reference number: This is the number you will need to quote in case of dispute on any of your charges listed in that particular credit card statement.
Credit card number: Most of the credit cards have a unique 16 digit number assigned to your credit card, usually super-imposed across the credit card. Some credit cards like American Express (AmEx) have 15-digit number. You need to quote this number in your cheque or demand draft while making payments and also for correspondence with the card issuer.
Credit limit: Credit limit is the maximum amount your credit card allows you to borrow, whether as credit against goods purchased or/and cash withdrawn. The card issuing bank can revise credit limit based on your payment track-record. A good payment track record can help you in getting your credit limit increased and vice versa.
Available credit limit: It is the difference between your credit limit and total amount due. If your credit limit is Rs 50,000 and you have spent Rs 1,500, your available credit limit reduces to 48,500.
Cash limit: Cash limit sets the maximum money you can withdraw as cash using your credit card. Your cash limit is a part of your credit limit and so, necessarily has to be lower than your credit limit.
Assume your credit limit is Rs 50,000 and cash limit is Rs 20,000. If you have exhausted your credit limit of Rs 50,000 by making purchases on your credit card, then you cannot withdraw cash using your credit card, even if you have not used your cash limit at all.
Statement date: This is the date on which your bill is generated. This is also the date used to calculate interest rate if you do not pay the full outstanding amount by the payment due date, even though the due date may fall many weeks after the statement date.
Payment due date: This is the date before which your payment (cheque or demand draft) should get credited to the bank. To be more specific, this is the last date by which your payment has to be recorded in your bank's computer. This is not the date your bill has to be postmarked, or even the date it arrives at the company's office. So be sure that your cheque/DD reaches the bank well before the due date so that no late payment fee is levied to you.
Total amount due: This is the total bill amount to be paid -- the total unpaid accumulated amount outstanding in your account, including interest and any other charges like late payment fees, if any.
Minimum amount due: It is the minimum amount required to be paid to keep your account in a good credit standing. This amount is usually 5 per cent to 20 per cent of your total amount due. If you do not pay the minimum amount due by payment due date, it will be considered as a default and levied a late payment fee.
Tip to remember: Even if you pay the minimum amount due, you will be charged interest on the total amount due (including the minimum amount due that you paid). If you do not want to pay interest you have to pay the entire total amount due before payment due date. Even if you have paid 95 per cent of the total amount due before due date but there is still some small amount pending, you will be charged interest for the full total amount due.
Rewards point summary: This is the record of the rewards points you have earned/redeemed till date. The summary usually gives an account of your opening balance and the points or credits earned or redeemed. You should not confuse reward points with credit limit or balance outstanding. Reward points and the method of redemption vary from one credit card to another.
Transaction details: The transaction details will have the date of transaction, place of transaction (where you spent the money) and the transaction amount. This helps you verify the charges credited to your card.
It is important that you check your credit card transaction details regularly. This is the only way you will come to know if some transaction has been fraudulently credited to your card.
from rediff.com
Benefits of investing in MFs
Open any newspaper or a magazine and you will not miss a story or two about the domestic equity market being propelled to new highs, personal fortunes of successful businessmen growing by leaps and bounds on the back of rising share prices, foreign investors pouring money into the Indian equity show with gusto to notch up double digit returns, etc.
Big investors, it seems, are always clued-in about the market movements and are able to ride out the ups and downs with relative ease. These investors are able to reap superior returns on account of access to research and advisory.
However, the small investors are not so lucky when it comes to direct investment in the equity market. They depend on tips from the so-called informed investors or brokers in the market or go by house views flashed on business channels. Gullible retail investors are easily taken in by market euphoria -- they invest when the market is close to peaking and are caught on the wrong foot when the market tanks.
In order to avoid getting mauled by the market yo-yo and earn good returns for their hard earned money over the long run, small investors will do well to park their money with mutual funds. Fund managers, with their wealth of experience in investing across asset classes, at fund houses help you make the most of market opportunities.
Volatility has now become a way of life in the Indian markets. A thousand points upside or downside is not uncommon. In this backdrop, Union finance minister P Chidambaram's caution to retail investors about volatility in the market and indirect suggestion that they should participate in the market through the mutual fund (MF) route assumes significance. MFs, hence, have become an attractive alternative to the retail investors.
A globally proven investment, MFs offer an investor the avenue to minimise risk through portfolio diversification while maximising returns thanks to the expertise of the fund managers. All investments whether in shares, debentures or deposits involve risk. While risk cannot be eliminated, skillful management can minimise risks. Generally, the longer the term, the lesser the risk.
So, what are the benefits of using the MF route?
First, benefit comes in the form of the fund manager. His/her expertise gained through experience helps an investor to diversify risk. What's more investors in MFs enjoy the advantage of convenient administrative cost, minimal paperwork and lower transaction cost.
MFs also offer other merits such as the ability to liquidate (sell units and get cash) an exposure fast if one feels that a fund is underperforming her/his expectations. It also makes high value stocks affordable to the small investor i.e. a small investor who would think twice before taking an exposure in a high value stock such as L&T say, is now able to do so using the MF route. This makes an MF a cut above the rest.
Last but not the least, MFs provide transparency in the form of frequently published Net asset values (NAVs) and flexibility through features like regular investment plans, regular withdrawal plans and dividend reinvestment plans.
The retail investor in India is spoilt for choice when it comes to mutual funds. There are 34 MFs and over 300 schemes with cumulative assets under management (AUM) of nearly Rs 4.7 lakh crores. India MF industry is regulated and regularly monitored by the market regulator The Securities and Exchange Board of India, Sebi.
Steps to invest in MFs
~ Step one: Identify your investment needs
Your financial goals will vary, based on your age, lifestyle, financial independence, family commitments and level of income and expenses among many other factors.
Therefore, the first step is to assess your needs. You can begin by defining your investment objectives and needs which could be regular income, buying a home or financing a wedding or on education of your children or a combination of all these needs, the quantum of risk you are willing to take and your cash flow requirements.
~ Step two: Choose the right mutual fund
The important thing is to choose the right MF scheme which suits your requirements. The offer document of the scheme tells you its objectives and provides supplementary details like the track record of other schemes managed by the same fund manager. Some factors to evaluate before choosing a particular MF are the track record of the performance of the fund over the last few years in relation to the appropriate yardstick and similar funds in the same category.
Other factors could be the portfolio allocation, the dividend yield and the degree of transparency as reflected in the frequency and quality of their communications.
~ Step three: Select the ideal mix of schemes
Investing in just one MF scheme may not meet all your investment needs. You may consider investing in a combination of schemes to achieve your specific goals. ~ Step four: Invest regularly
The best approach is to invest a fixed amount at specific intervals, say every month. By investing a fixed sum every month, you buy fewer units when the price is higher and more units when the price is low, thus bringing down your average cost per unit. This is called rupee cost averaging and is a disciplined investment strategy followed by investors all over the world. You can also avail the systematic investment plan (SIP) facility offered by many open-ended funds.
~ Step five: Start early
It is desirable to start investing early and stick to a regular investment plan. If you start now, you will make more than if you wait and invest later. The power of compounding lets you earn income on income and your money multiplies at a compounded rate of return.
You may reap the rewards in the years to come. MFs are suitable for every kind of investor -- whether starting a career or retiring, conservative or risk taking, growth oriented or income seeking. To sum up, mutual fund is the way to go for the retail investors. This route to investment is less cumbersome and more rewarding in the long run.
from rediff.com
Big investors, it seems, are always clued-in about the market movements and are able to ride out the ups and downs with relative ease. These investors are able to reap superior returns on account of access to research and advisory.
However, the small investors are not so lucky when it comes to direct investment in the equity market. They depend on tips from the so-called informed investors or brokers in the market or go by house views flashed on business channels. Gullible retail investors are easily taken in by market euphoria -- they invest when the market is close to peaking and are caught on the wrong foot when the market tanks.
In order to avoid getting mauled by the market yo-yo and earn good returns for their hard earned money over the long run, small investors will do well to park their money with mutual funds. Fund managers, with their wealth of experience in investing across asset classes, at fund houses help you make the most of market opportunities.
Volatility has now become a way of life in the Indian markets. A thousand points upside or downside is not uncommon. In this backdrop, Union finance minister P Chidambaram's caution to retail investors about volatility in the market and indirect suggestion that they should participate in the market through the mutual fund (MF) route assumes significance. MFs, hence, have become an attractive alternative to the retail investors.
A globally proven investment, MFs offer an investor the avenue to minimise risk through portfolio diversification while maximising returns thanks to the expertise of the fund managers. All investments whether in shares, debentures or deposits involve risk. While risk cannot be eliminated, skillful management can minimise risks. Generally, the longer the term, the lesser the risk.
So, what are the benefits of using the MF route?
First, benefit comes in the form of the fund manager. His/her expertise gained through experience helps an investor to diversify risk. What's more investors in MFs enjoy the advantage of convenient administrative cost, minimal paperwork and lower transaction cost.
MFs also offer other merits such as the ability to liquidate (sell units and get cash) an exposure fast if one feels that a fund is underperforming her/his expectations. It also makes high value stocks affordable to the small investor i.e. a small investor who would think twice before taking an exposure in a high value stock such as L&T say, is now able to do so using the MF route. This makes an MF a cut above the rest.
Last but not the least, MFs provide transparency in the form of frequently published Net asset values (NAVs) and flexibility through features like regular investment plans, regular withdrawal plans and dividend reinvestment plans.
The retail investor in India is spoilt for choice when it comes to mutual funds. There are 34 MFs and over 300 schemes with cumulative assets under management (AUM) of nearly Rs 4.7 lakh crores. India MF industry is regulated and regularly monitored by the market regulator The Securities and Exchange Board of India, Sebi.
Steps to invest in MFs
~ Step one: Identify your investment needs
Your financial goals will vary, based on your age, lifestyle, financial independence, family commitments and level of income and expenses among many other factors.
Therefore, the first step is to assess your needs. You can begin by defining your investment objectives and needs which could be regular income, buying a home or financing a wedding or on education of your children or a combination of all these needs, the quantum of risk you are willing to take and your cash flow requirements.
~ Step two: Choose the right mutual fund
The important thing is to choose the right MF scheme which suits your requirements. The offer document of the scheme tells you its objectives and provides supplementary details like the track record of other schemes managed by the same fund manager. Some factors to evaluate before choosing a particular MF are the track record of the performance of the fund over the last few years in relation to the appropriate yardstick and similar funds in the same category.
Other factors could be the portfolio allocation, the dividend yield and the degree of transparency as reflected in the frequency and quality of their communications.
~ Step three: Select the ideal mix of schemes
Investing in just one MF scheme may not meet all your investment needs. You may consider investing in a combination of schemes to achieve your specific goals. ~ Step four: Invest regularly
The best approach is to invest a fixed amount at specific intervals, say every month. By investing a fixed sum every month, you buy fewer units when the price is higher and more units when the price is low, thus bringing down your average cost per unit. This is called rupee cost averaging and is a disciplined investment strategy followed by investors all over the world. You can also avail the systematic investment plan (SIP) facility offered by many open-ended funds.
~ Step five: Start early
It is desirable to start investing early and stick to a regular investment plan. If you start now, you will make more than if you wait and invest later. The power of compounding lets you earn income on income and your money multiplies at a compounded rate of return.
You may reap the rewards in the years to come. MFs are suitable for every kind of investor -- whether starting a career or retiring, conservative or risk taking, growth oriented or income seeking. To sum up, mutual fund is the way to go for the retail investors. This route to investment is less cumbersome and more rewarding in the long run.
from rediff.com
Beginner's guide to ideal financial planning
The investment requirements of a family keep changing over time. This is primarily because of the adjustments that need to be made with different stages of life.
Though investing needs will differ depending on individuals and families, there are certain investing patterns that are typical of certain ages and stages in one's life cycle.
Let us explore these life stages and what people should ideally be doing with their finances at that time.
The sowing stage
Yes, you are in your mid-20s and have just received your first salary. To start thinking about retirement right now does sound like a bit of a drag. But starting early allows you to save that little bit more and with smaller amounts as well.
The ability to save at this stage is higher as you have little or no responsibilities. So, channelising a part of your newfound cash flows into a retirement corpus is just ideal. Also, it is a big help at the latter stages when the responsibilities are more.
Let us illustrate this with some numbers. If you started investing for your retirement at 25, and plan to retire at 55, with a retirement corpus of Rs 3.5 crore (Rs 35 million), then if you start saving at 25, you need to save Rs 8,772 per month till age 55 in a balanced portfolio.
This portfolio is expected to give you an average return of 12 per cent annually. If you start five years later at 30, the monthly outgo for the same retirement corpus would be Rs 16,270.
Ideally use the systematic investment plan route in diversified equity mutual funds or even some mid-cap funds. Since you are young, aggressive investments are possible.
Also, buy personal medical, accident, critical illness and disability insurance for support, in case of any unfortunate incidents.
Accumulation stage
Upon marriage, consider adding term life risk cover policies for income protection. Also, start planning for a house, if you need one. A housing loan at this juncture will be not a burden as expenses are still not so high. Once you have children, expenses are sure to spiral.
Also, this stage is initially marked with marriage and then with children. With children, you will need to start investing towards their education and marriage as well. This is one of the most financially challenging periods in one's life, since demand for expenses as well as need for investment for various goals is at the highest point.
But you should take it up as a challenge and make it a point to invest towards all these goals.
With rising responsibilities comes the need to create a contingency fund. Ideally, you should have 6-12 months' expenses in a bank fixed deposit with overdraft facility or a liquid/short-term debt fund. This helps a lot in meeting expenses in emergencies or while shifting jobs.
The ideal investment avenue for children's goals would again be equity mutual funds. Look even at children's plans offered by various mutual funds. For marriage purposes, start an SIP in a gold exchange traded fund, which can be converted to physical format.
Transitional stage
In your forties, it is time to reassess your financial goals as your children are older and you are also approaching old age. If you have diligently done the above in the earlier years then there is a lot of breathing space and you should be in a position to review your goals upwards. For instance, you may want foreign education for your children, a bigger flat at a better location and so on and so forth.
Empty nesters
As you approach 50, the situation could have taken a dramatic turn. The children might have left to complete their higher education elsewhere. And to fund this, you would have started drawing out from their education corpus.
Since investment for children's education goals have ceased, you can use the extra sum to retire any existing loans. Moreover, this an opportune time to take a final call on your retirement plans and other goals post-retirement.
Harvesters
You have retired now. And there are three important things that you need to keep in mind; regular income, capital protection and liquidity.
Accordingly, put a large part of your retirement corpus into fixed income instruments, like senior citizens' savings scheme, bank fixed deposits or fixed maturity plans of mutual funds. If you want an equity exposure, it should be marginal, through monthly income plans or balanced funds.
If these investments are leading to taxation, you may also think of investing in debt schemes or FMPs with indexation benefits, to lower your tax burden. Another suitable avenue to park part of one's retirement corpus would be to purchase property, which will provide monthly rental income as well as capital appreciation.
As you can see there are different plans that one needs to put at different times in your life cycle. Start investing now for great results.
Though investing needs will differ depending on individuals and families, there are certain investing patterns that are typical of certain ages and stages in one's life cycle.
Let us explore these life stages and what people should ideally be doing with their finances at that time.
The sowing stage
Yes, you are in your mid-20s and have just received your first salary. To start thinking about retirement right now does sound like a bit of a drag. But starting early allows you to save that little bit more and with smaller amounts as well.
The ability to save at this stage is higher as you have little or no responsibilities. So, channelising a part of your newfound cash flows into a retirement corpus is just ideal. Also, it is a big help at the latter stages when the responsibilities are more.
Let us illustrate this with some numbers. If you started investing for your retirement at 25, and plan to retire at 55, with a retirement corpus of Rs 3.5 crore (Rs 35 million), then if you start saving at 25, you need to save Rs 8,772 per month till age 55 in a balanced portfolio.
This portfolio is expected to give you an average return of 12 per cent annually. If you start five years later at 30, the monthly outgo for the same retirement corpus would be Rs 16,270.
Ideally use the systematic investment plan route in diversified equity mutual funds or even some mid-cap funds. Since you are young, aggressive investments are possible.
Also, buy personal medical, accident, critical illness and disability insurance for support, in case of any unfortunate incidents.
Accumulation stage
Upon marriage, consider adding term life risk cover policies for income protection. Also, start planning for a house, if you need one. A housing loan at this juncture will be not a burden as expenses are still not so high. Once you have children, expenses are sure to spiral.
Also, this stage is initially marked with marriage and then with children. With children, you will need to start investing towards their education and marriage as well. This is one of the most financially challenging periods in one's life, since demand for expenses as well as need for investment for various goals is at the highest point.
But you should take it up as a challenge and make it a point to invest towards all these goals.
With rising responsibilities comes the need to create a contingency fund. Ideally, you should have 6-12 months' expenses in a bank fixed deposit with overdraft facility or a liquid/short-term debt fund. This helps a lot in meeting expenses in emergencies or while shifting jobs.
The ideal investment avenue for children's goals would again be equity mutual funds. Look even at children's plans offered by various mutual funds. For marriage purposes, start an SIP in a gold exchange traded fund, which can be converted to physical format.
Transitional stage
In your forties, it is time to reassess your financial goals as your children are older and you are also approaching old age. If you have diligently done the above in the earlier years then there is a lot of breathing space and you should be in a position to review your goals upwards. For instance, you may want foreign education for your children, a bigger flat at a better location and so on and so forth.
Empty nesters
As you approach 50, the situation could have taken a dramatic turn. The children might have left to complete their higher education elsewhere. And to fund this, you would have started drawing out from their education corpus.
Since investment for children's education goals have ceased, you can use the extra sum to retire any existing loans. Moreover, this an opportune time to take a final call on your retirement plans and other goals post-retirement.
Harvesters
You have retired now. And there are three important things that you need to keep in mind; regular income, capital protection and liquidity.
Accordingly, put a large part of your retirement corpus into fixed income instruments, like senior citizens' savings scheme, bank fixed deposits or fixed maturity plans of mutual funds. If you want an equity exposure, it should be marginal, through monthly income plans or balanced funds.
If these investments are leading to taxation, you may also think of investing in debt schemes or FMPs with indexation benefits, to lower your tax burden. Another suitable avenue to park part of one's retirement corpus would be to purchase property, which will provide monthly rental income as well as capital appreciation.
As you can see there are different plans that one needs to put at different times in your life cycle. Start investing now for great results.
Wednesday, November 28, 2007
How not to evaluate mutual funds
A lot of mutual fund advice/research out there is focussed on how investors must evaluate mutual funds. Unfortunately, that is often not enough, which explains why wrong mutual funds are still sold/bought and mis-selling continues to be the bane of the industry. As a result, a lot of investors who end up investing in the wrong investment are left very disillusioned with how their investments have performed. All this can be prevented if investors are armed with two rules – guidelines on how to evaluate a mutual fund and just as importantly – guidelines on how not to evaluate a mutual fund. This note deals with the latter.
1. Don’t read too much into past performanceRead any mutual fund advertisement and there is likely to be a mention of the fund’s incredible performance over the years. At times the focus on past performance is so overwhelming that it leaves investors with the impression that, it is all that matters while investing in a mutual fund. In our view, past performance is important, but it is just one of half a dozen factors that must be considered while investing in a mutual fund. Among other factors that rarely find a mention in advertisements are the fund house’s investment philosophy and processes, level of ethics, performance across market phases especially the downturns.
2. Don’t read too much into mutual fund ratingsIn our view, mutual fund ratings get more than their share of attention from investors, which is unfortunate. This is especially true since in the Indian context mutual fund ratings are often biased towards returns with little or no room for evaluating among other factors, the fund house’s investment philosophy, processes, track record on transparency, compliance and ethics. Since the ratings are so heavily dependent on returns they are unviable, as investors cannot be expected to invest or redeem their investments every time there is a change in the ratings.
Investors may want to consider what Morningstar, a leading stock and mutual fund research firm based in the US which in a way pioneered the concept of mutual fund ratings, has to say about its own ratings:
"As always the Morningstar Rating is intended for use as a first step in the fund evaluation process. A high rating alone is not sufficient basis for investment decisions."
3. Don’t read too much into CAGR performance One of the many selling points for mutual funds is their performance in terms of compounded annualised growth rate (CAGR). Any student of mathematics can confirm this – CAGR is just an indicator of growth between two points (or between two dates as in the case of a mutual fund investment). It tells you nothing about what transpired in the interval and more importantly it tells you nothing about the risk the mutual fund has exposed investors to and the investment process that generated that CAGR. At the end, the CAGR hides more than it reveals which is why investors should not read more in it than necessary.
4. Don’t count on the star fund managerYou will notice this point is a little different from the previous points. Unlike other factors like past performance that merit some (positive) consideration, the presence of a star fund manager merits no such consideration. On the contrary a fund house must be given negative marks for attributing its success to a star fund manager. While over the short-term a star fund manager may bring about a dramatic change in the mutual fund’s performance, over the long-term he can do more harm than good.
As a mutual fund’s performance gets inextricably linked with the presence of the star fund manager, his existence in the fund house becomes a prerequisite for the fund’s success. If the star fund manager quits the fund house, it could leave the fund and its investors in the lurch because the existing team is unlikely to be capacitated to deliver on the same lines as the star fund manager.
So what must investors do? Go for fund houses that institutionalise the fund management process by building teams that are guided by well-defined processes where individuals have a limited role to play.
5. Don’t question every investment decision made by your fund managerWhile it’s good to be aware of what your fund manager is up to, it is only in the fitness of things that you let him do what he is good at doing, which is identifying the best investment opportunities ahead of the competition. As an investor you must do what you are supposed to do which is getting your financial planner involved in the process of keeping a tab on your investments. The financial planner (provided he is honest and competent) should be the one to tell you whether the fund manager is investing in line with his pre-determined investment mandate and philosophy. Once you understand the roles defined for all three parties over here – fund manager, financial planner and you (i.e. the investor) you will not waste your time agonising over views like whether your fund manager is doing the right thing by investing in software stocks in the backdrop of a rising rupee.
1. Don’t read too much into past performanceRead any mutual fund advertisement and there is likely to be a mention of the fund’s incredible performance over the years. At times the focus on past performance is so overwhelming that it leaves investors with the impression that, it is all that matters while investing in a mutual fund. In our view, past performance is important, but it is just one of half a dozen factors that must be considered while investing in a mutual fund. Among other factors that rarely find a mention in advertisements are the fund house’s investment philosophy and processes, level of ethics, performance across market phases especially the downturns.
2. Don’t read too much into mutual fund ratingsIn our view, mutual fund ratings get more than their share of attention from investors, which is unfortunate. This is especially true since in the Indian context mutual fund ratings are often biased towards returns with little or no room for evaluating among other factors, the fund house’s investment philosophy, processes, track record on transparency, compliance and ethics. Since the ratings are so heavily dependent on returns they are unviable, as investors cannot be expected to invest or redeem their investments every time there is a change in the ratings.
Investors may want to consider what Morningstar, a leading stock and mutual fund research firm based in the US which in a way pioneered the concept of mutual fund ratings, has to say about its own ratings:
"As always the Morningstar Rating is intended for use as a first step in the fund evaluation process. A high rating alone is not sufficient basis for investment decisions."
3. Don’t read too much into CAGR performance One of the many selling points for mutual funds is their performance in terms of compounded annualised growth rate (CAGR). Any student of mathematics can confirm this – CAGR is just an indicator of growth between two points (or between two dates as in the case of a mutual fund investment). It tells you nothing about what transpired in the interval and more importantly it tells you nothing about the risk the mutual fund has exposed investors to and the investment process that generated that CAGR. At the end, the CAGR hides more than it reveals which is why investors should not read more in it than necessary.
4. Don’t count on the star fund managerYou will notice this point is a little different from the previous points. Unlike other factors like past performance that merit some (positive) consideration, the presence of a star fund manager merits no such consideration. On the contrary a fund house must be given negative marks for attributing its success to a star fund manager. While over the short-term a star fund manager may bring about a dramatic change in the mutual fund’s performance, over the long-term he can do more harm than good.
As a mutual fund’s performance gets inextricably linked with the presence of the star fund manager, his existence in the fund house becomes a prerequisite for the fund’s success. If the star fund manager quits the fund house, it could leave the fund and its investors in the lurch because the existing team is unlikely to be capacitated to deliver on the same lines as the star fund manager.
So what must investors do? Go for fund houses that institutionalise the fund management process by building teams that are guided by well-defined processes where individuals have a limited role to play.
5. Don’t question every investment decision made by your fund managerWhile it’s good to be aware of what your fund manager is up to, it is only in the fitness of things that you let him do what he is good at doing, which is identifying the best investment opportunities ahead of the competition. As an investor you must do what you are supposed to do which is getting your financial planner involved in the process of keeping a tab on your investments. The financial planner (provided he is honest and competent) should be the one to tell you whether the fund manager is investing in line with his pre-determined investment mandate and philosophy. Once you understand the roles defined for all three parties over here – fund manager, financial planner and you (i.e. the investor) you will not waste your time agonising over views like whether your fund manager is doing the right thing by investing in software stocks in the backdrop of a rising rupee.
Reading a Mutual Fund Fact Sheet
This article was written by Personalfn for Business India, and was carried in its June 18, 2006 issue with the title, "Get the facts right". The original draft, in its entirety, has been retained here.
For some investors, a mutual fund factsheet serves the purpose of looking back and reminding themselves about their investments and finding out where they are headed. For others it is only a publication that adds little value. This is mainly because the second group of investors is unable to anlayse information from the factsheet and primarily depends on their investment advisor to unravel it for them. We believe investors should be self-reliant as far as evaluating their investment is concerned and that the fact sheet can help them on this front.
A factsheet presents an ocean of information about the AMC (Asset Management Company) and its various schemes. It provides valuable information, which is not only important for an existing investor but also for a prospective one. What an investor really needs to do is to extract the most relevant information from the factsheet, which can help him in tracking his existing investment or decide upon his future course of action. Also while analysing a factsheet, investors usually place more importance on net asset value (NAV). They tend to ignore other equally important information points simply because they are not competent enough to interpret it. We have highlighted some of the important points in a diversified equity fund’s factsheet that should draw the investor’s attention.
1. Investment objective
The mutual fund’s investment objective states what it aims to achieve e.g. capital appreciation, income generation among others. It could also inform the investor about the investment style of the fund and the kind of risk it is prepared to take for achieving its investment objective. For instance, a broad investment objective like ‘aiming for capital appreciation’ means the equity fund has a flexible investment approach and is likely to do whatever it takes to clock capital appreciation. A lot of equity funds in the past were launched with a rather minimal investment objective like ‘capital appreciation’. It gave investors little idea about how the mutual fund planned to conduct its investment activity. Nowadays of course, mutual funds have pointed investment objectives that give the investor a fairly good idea about how the mutual fund will go about its investments.
Ideally, an investment objective should be pointed enough for the investor to understand whether his own investment objective fits well with that of the mutual fund. For instance, an investment objective that states that the fund will ‘attempt to generate capital appreciation by investing significantly in the mid cap segment’, it tells the investor that it is likely to be a high risk – high return investment. If the investor has the risk appetite for such an investment he can consider investing in the fund.
2. Portfolio diversification
Portfolio diversification can be broadly explained under two categories:
a. Top 10 stock holdingsConcentration levels in the top 10 stocks reveals a lot about the investment approach of the fund. In our view, if the top 10 stocks of a diversified equity fund account for over 40% of the net assets then the fund should be regarded as concentrated as opposed to being diversified. A concentrated portfolio is usually a candidate for market volatility. While it may generate above-average growth during a market upturn, it will be a sitting duck during the downturn.
b. Sectoral allocationThis is another area that deserves a close look. A diversified equity fund is expected to be diversified across several sectors. If a fund has invested heavily across a few sectors, it qualifies as a sectorally concentrated equity fund. This could expose the mutual fund to higher levels of volatility during market turbulence. Sectoral concentration works against the fund if a particular sector/ sectors in which it has invested significantly is not performing as per expectations.
Looking at the sectoral allocation becomes particularly relevant because we have observed that equity funds are often well diversified across the top 10 stocks, but are heavily concentrated across a few sectors. During a market downturn, these funds tend to do as poorly as other concentrated funds.
While on the surface, some funds might seem like they are sectorally well diversified, a closer look might reveal otherwise. For example, it is not uncommon to find that similar-natured sectors such as ‘industrial capital goods’ and ‘industrial products’ being shown separately in the factsheet. This makes the fund look more diversified than it actually is. That is why, while analysing sectoral allocation, similar sectors should be clubbed together.
3. Fund Performance
This is the most popular criterion for most investors. All mutual funds publish NAV returns in their factsheet across various time frames. For an equity fund it is important to analyse returns for a longer duration of 3 years or even more. That is because as an asset class, equities tend to unlock their potential over a longer time horizon. An investor should ensure consistency of returns over various time frames. The best way to test the fund on this criterion is to check its returns over a calendar year as opposed to compounded annual growth returns (CAGR). The returns of the mutual fund scheme under review should be compared with other mutual funds from the same category across AMCs.
Another important parameter for judging the fund’s performance is by scrutinising how it has faired against its benchmark index. Every fund has a benchmark index. For instance, equity funds are often benchmarked against BSE Sensex S&P CNX Nifty, BSE 200, CNX Midcap among others. The index is a yardstick for evaluating the returns of the fund. A fund is expected to outperform its benchmark index across market cycles to qualify as a superior fund.
4. Loads and Expense Ratios
Fund houses normally disclose the load structure and expense ratios in the factsheets. The loads and expenses have a bearing on the fund’s performance. The fund’s NAV is declared after expenses have been factored in. Hence, higher expenses for a fund can impact its returns adversely over the long term. Similarly loads (entry/exit) are an initial cost that the investor has to bear at the time of investing in or exiting from the mutual fund. To get a fair idea, the investor should compare loads and expense ratios across various fund houses.
One important aspect that investors must bear in mind is that although loads and expense ratios have a direct impact on the returns, this cannot be the sole criterion for evaluating a mutual fund scheme. Other criteria like fund management style and performance should be given higher priority while investing rather than loads and expense ratios. In other words, a mutual fund with an average track record but lower expenses should not be given preference over an expensive mutual fund with an impressive track record. In such a case, consider the higher expenses as the ‘price’ you have to pay for investing in a well-managed fund.
5. Investment objective Vs Actual performance
It is important to understand whether the fund was able to adhere to and achieve its investment objective/mandate. For instance, a lot of large cap equity funds tend to make above-average allocation to mid cap stocks when this segment witnesses a rally. Or a balanced fund/MIP (monthly income plan) may up its equity allocation to benefit from a stock market rally while ignoring the ceiling on its equity investments. Always invest in a fund that treats its investment objective as sacrosanct and rigidly adheres to the same across time periods and market cycles. Investors must be wary of mutual funds that haven’t adhered to their investment objective/style.
inputs from personalfn.com
For some investors, a mutual fund factsheet serves the purpose of looking back and reminding themselves about their investments and finding out where they are headed. For others it is only a publication that adds little value. This is mainly because the second group of investors is unable to anlayse information from the factsheet and primarily depends on their investment advisor to unravel it for them. We believe investors should be self-reliant as far as evaluating their investment is concerned and that the fact sheet can help them on this front.
A factsheet presents an ocean of information about the AMC (Asset Management Company) and its various schemes. It provides valuable information, which is not only important for an existing investor but also for a prospective one. What an investor really needs to do is to extract the most relevant information from the factsheet, which can help him in tracking his existing investment or decide upon his future course of action. Also while analysing a factsheet, investors usually place more importance on net asset value (NAV). They tend to ignore other equally important information points simply because they are not competent enough to interpret it. We have highlighted some of the important points in a diversified equity fund’s factsheet that should draw the investor’s attention.
1. Investment objective
The mutual fund’s investment objective states what it aims to achieve e.g. capital appreciation, income generation among others. It could also inform the investor about the investment style of the fund and the kind of risk it is prepared to take for achieving its investment objective. For instance, a broad investment objective like ‘aiming for capital appreciation’ means the equity fund has a flexible investment approach and is likely to do whatever it takes to clock capital appreciation. A lot of equity funds in the past were launched with a rather minimal investment objective like ‘capital appreciation’. It gave investors little idea about how the mutual fund planned to conduct its investment activity. Nowadays of course, mutual funds have pointed investment objectives that give the investor a fairly good idea about how the mutual fund will go about its investments.
Ideally, an investment objective should be pointed enough for the investor to understand whether his own investment objective fits well with that of the mutual fund. For instance, an investment objective that states that the fund will ‘attempt to generate capital appreciation by investing significantly in the mid cap segment’, it tells the investor that it is likely to be a high risk – high return investment. If the investor has the risk appetite for such an investment he can consider investing in the fund.
2. Portfolio diversification
Portfolio diversification can be broadly explained under two categories:
a. Top 10 stock holdingsConcentration levels in the top 10 stocks reveals a lot about the investment approach of the fund. In our view, if the top 10 stocks of a diversified equity fund account for over 40% of the net assets then the fund should be regarded as concentrated as opposed to being diversified. A concentrated portfolio is usually a candidate for market volatility. While it may generate above-average growth during a market upturn, it will be a sitting duck during the downturn.
b. Sectoral allocationThis is another area that deserves a close look. A diversified equity fund is expected to be diversified across several sectors. If a fund has invested heavily across a few sectors, it qualifies as a sectorally concentrated equity fund. This could expose the mutual fund to higher levels of volatility during market turbulence. Sectoral concentration works against the fund if a particular sector/ sectors in which it has invested significantly is not performing as per expectations.
Looking at the sectoral allocation becomes particularly relevant because we have observed that equity funds are often well diversified across the top 10 stocks, but are heavily concentrated across a few sectors. During a market downturn, these funds tend to do as poorly as other concentrated funds.
While on the surface, some funds might seem like they are sectorally well diversified, a closer look might reveal otherwise. For example, it is not uncommon to find that similar-natured sectors such as ‘industrial capital goods’ and ‘industrial products’ being shown separately in the factsheet. This makes the fund look more diversified than it actually is. That is why, while analysing sectoral allocation, similar sectors should be clubbed together.
3. Fund Performance
This is the most popular criterion for most investors. All mutual funds publish NAV returns in their factsheet across various time frames. For an equity fund it is important to analyse returns for a longer duration of 3 years or even more. That is because as an asset class, equities tend to unlock their potential over a longer time horizon. An investor should ensure consistency of returns over various time frames. The best way to test the fund on this criterion is to check its returns over a calendar year as opposed to compounded annual growth returns (CAGR). The returns of the mutual fund scheme under review should be compared with other mutual funds from the same category across AMCs.
Another important parameter for judging the fund’s performance is by scrutinising how it has faired against its benchmark index. Every fund has a benchmark index. For instance, equity funds are often benchmarked against BSE Sensex S&P CNX Nifty, BSE 200, CNX Midcap among others. The index is a yardstick for evaluating the returns of the fund. A fund is expected to outperform its benchmark index across market cycles to qualify as a superior fund.
4. Loads and Expense Ratios
Fund houses normally disclose the load structure and expense ratios in the factsheets. The loads and expenses have a bearing on the fund’s performance. The fund’s NAV is declared after expenses have been factored in. Hence, higher expenses for a fund can impact its returns adversely over the long term. Similarly loads (entry/exit) are an initial cost that the investor has to bear at the time of investing in or exiting from the mutual fund. To get a fair idea, the investor should compare loads and expense ratios across various fund houses.
One important aspect that investors must bear in mind is that although loads and expense ratios have a direct impact on the returns, this cannot be the sole criterion for evaluating a mutual fund scheme. Other criteria like fund management style and performance should be given higher priority while investing rather than loads and expense ratios. In other words, a mutual fund with an average track record but lower expenses should not be given preference over an expensive mutual fund with an impressive track record. In such a case, consider the higher expenses as the ‘price’ you have to pay for investing in a well-managed fund.
5. Investment objective Vs Actual performance
It is important to understand whether the fund was able to adhere to and achieve its investment objective/mandate. For instance, a lot of large cap equity funds tend to make above-average allocation to mid cap stocks when this segment witnesses a rally. Or a balanced fund/MIP (monthly income plan) may up its equity allocation to benefit from a stock market rally while ignoring the ceiling on its equity investments. Always invest in a fund that treats its investment objective as sacrosanct and rigidly adheres to the same across time periods and market cycles. Investors must be wary of mutual funds that haven’t adhered to their investment objective/style.
inputs from personalfn.com
CAGR - Not the best choice always
For most investors, a fund’s performance on the net asset value (NAV) appreciation front is sacred i.e. returns is the only parameter to be considered while making an investment decision. Its showing on other parameters like volatility control and risk-adjusted return is almost never taken into account; also, the fund’s portfolio management style and the fund house’s pedigree are ignored. Making an investment decision based solely on the NAV performance is a flawed approach, since a fund’s showing on the returns front can be misleading.
Yes, you read that right! A fund’s NAV appreciation figures can be misleading. How can simple numbers mislead, you might ask. The answer – compounded annual growth rate or CAGR as it is better known. The performances of mutual fund schemes over longer time frames (i.e. over 1-Yr) are expressed in CAGR terms.
You have probably come across this term in mutual fund fact sheets and performance-related advertisements. As per guidelines issued by SEBI (Securities and Exchange Board of India), performances of funds for time frames more than a year are required to be compounded annualised i.e. expressed in CAGR terms.
What is CAGR? Simply put, CAGR computes the growth clocked by an investment, assuming that it occurs at a steady rate. In other words, the CAGR smoothens the highs and lows between the investment tenure. An example should help us better understand the same. Assume that you invest Rs 10,000 in a mutual fund on September 28, 2004, and stay invested for a period of 3 years. As on September 28, 2007, the investment is worth Rs 30,000. This gives you a return of 44.2% CAGR over the 3-Yr investment tenure. In other words, your investment grew at 44.2% every year, during the 3-Yr period.
This is how you calculate CAGR:
CAGR = {(Present Value of Investment/Purchase Price) ^ [1/(Number of Years)] - 1}
Why CAGR can be misleading
As mentioned earlier, CAGR smoothens the highs and lows and puts forth a steady growth rate. In the example above, the 44.2% CAGR doesn’t reveal the instances when the growth rate dipped below or rose above 44.2%. Hence, the volatility in the fund’s performance is concealed, thereby not providing a complete picture.
In the table above, we have an equity fund that was launched in September 2002 at an NAV of Rs 10. As can be seen, the fund has fared modestly in the first 3 years, clocking growths of 10.0%, 18.2% and 15.4% in the first, second and third year respectively. However, fund has performed extremely well in the fourth (60.0%) and fifth (70.8%) years. Over a 5-Yr period, the fund has clocked a growth of 32.6% CAGR, which can be termed as a competitive growth rate.
However, what the 32.6% CAGR fails to reveal was that the fund was a mediocre performer in the initial years of its existence. It’s only over the last two years, that the fund has made a turnaround and delivered impressive returns. This recent performance has cloaked the modest performance over the initial years and made the fund look like a competent long-term performer.
Generally, thematic/sector funds show a similar trend. These funds tend to perform well in shorter time periods when the underlying theme/sector hits a purple patch. However, the performance in the aforementioned periods is good enough to mask the lackluster showing in the past.
Then, there are funds that have capitalised on a bull run by taking on higher risk. For example, a fund that is a dud in the normal course could take on aggressive stock and sectoral bets and make the most of a bull run. The result – an impressive showing based on CAGR for longer time periods. Fund houses are happy to showcase the ‘impressive’ CAGR numbers of these duds in a bid to draw in investors.
Let’s not forget that the converse is true as well. A fund which has a track record of being a consistent performer, could hit a rough patch for some time. The result – a poor showing on the CAGR front.
As a research house, at Personalfn we have come across numerous instances of very mediocre funds featuring higher up in the rankings on the back of just one good rally. In fact, the 4-Yr-long runup in stock markets has served to ‘improve’ the performances of most equity funds regardless of their investment processes, philosophy and approach (Remember a rising tide lifts all boats).
Unsuspecting investors are likely to believe that the fund (with impressive CAGR numbers) has performed well consistently over the years based on intelligent stock picking, while it’s just that the latest rally has improved its CAGR numbers. In fact, most NFOs (new fund offers) that were launched over the last 4 years have very impressive CAGR numbers thanks in no small measure to the stock market rally. These funds have yet to witness a bearish phase and it’s anyone’s guess how they will fare over a sustained market downturn (It’s only when the tide is out, do you see who has been swimming naked).
The solutionSo, how can you ensure that the CAGR doesn’t mislead you into making an incorrect investment decision? Quite simple. Don’t accord the past performance numbers more importance than they deserve. Sure, it’s an important parameter, but certainly not the only one or the one to be considered in isolation.
Find out how the fund fares when compared to its peers and benchmark index. Evaluate the fund on parameters like volatility control and risk-adjusted return. Study the fund’s portfolio over longer time frames. Find out if the fund has adhered to its investment mandate and if it has a steady investment style that has worked for it over the long-term and across market cycles (particularly the downturns).
Evaluating a mutual fund is easier said than done. Ensure that factors like past performance and CAGR don’t mislead you.
inputs from personalfn.com
Yes, you read that right! A fund’s NAV appreciation figures can be misleading. How can simple numbers mislead, you might ask. The answer – compounded annual growth rate or CAGR as it is better known. The performances of mutual fund schemes over longer time frames (i.e. over 1-Yr) are expressed in CAGR terms.
You have probably come across this term in mutual fund fact sheets and performance-related advertisements. As per guidelines issued by SEBI (Securities and Exchange Board of India), performances of funds for time frames more than a year are required to be compounded annualised i.e. expressed in CAGR terms.
What is CAGR? Simply put, CAGR computes the growth clocked by an investment, assuming that it occurs at a steady rate. In other words, the CAGR smoothens the highs and lows between the investment tenure. An example should help us better understand the same. Assume that you invest Rs 10,000 in a mutual fund on September 28, 2004, and stay invested for a period of 3 years. As on September 28, 2007, the investment is worth Rs 30,000. This gives you a return of 44.2% CAGR over the 3-Yr investment tenure. In other words, your investment grew at 44.2% every year, during the 3-Yr period.
This is how you calculate CAGR:
CAGR = {(Present Value of Investment/Purchase Price) ^ [1/(Number of Years)] - 1}
Why CAGR can be misleading
As mentioned earlier, CAGR smoothens the highs and lows and puts forth a steady growth rate. In the example above, the 44.2% CAGR doesn’t reveal the instances when the growth rate dipped below or rose above 44.2%. Hence, the volatility in the fund’s performance is concealed, thereby not providing a complete picture.
In the table above, we have an equity fund that was launched in September 2002 at an NAV of Rs 10. As can be seen, the fund has fared modestly in the first 3 years, clocking growths of 10.0%, 18.2% and 15.4% in the first, second and third year respectively. However, fund has performed extremely well in the fourth (60.0%) and fifth (70.8%) years. Over a 5-Yr period, the fund has clocked a growth of 32.6% CAGR, which can be termed as a competitive growth rate.
However, what the 32.6% CAGR fails to reveal was that the fund was a mediocre performer in the initial years of its existence. It’s only over the last two years, that the fund has made a turnaround and delivered impressive returns. This recent performance has cloaked the modest performance over the initial years and made the fund look like a competent long-term performer.
Generally, thematic/sector funds show a similar trend. These funds tend to perform well in shorter time periods when the underlying theme/sector hits a purple patch. However, the performance in the aforementioned periods is good enough to mask the lackluster showing in the past.
Then, there are funds that have capitalised on a bull run by taking on higher risk. For example, a fund that is a dud in the normal course could take on aggressive stock and sectoral bets and make the most of a bull run. The result – an impressive showing based on CAGR for longer time periods. Fund houses are happy to showcase the ‘impressive’ CAGR numbers of these duds in a bid to draw in investors.
Let’s not forget that the converse is true as well. A fund which has a track record of being a consistent performer, could hit a rough patch for some time. The result – a poor showing on the CAGR front.
As a research house, at Personalfn we have come across numerous instances of very mediocre funds featuring higher up in the rankings on the back of just one good rally. In fact, the 4-Yr-long runup in stock markets has served to ‘improve’ the performances of most equity funds regardless of their investment processes, philosophy and approach (Remember a rising tide lifts all boats).
Unsuspecting investors are likely to believe that the fund (with impressive CAGR numbers) has performed well consistently over the years based on intelligent stock picking, while it’s just that the latest rally has improved its CAGR numbers. In fact, most NFOs (new fund offers) that were launched over the last 4 years have very impressive CAGR numbers thanks in no small measure to the stock market rally. These funds have yet to witness a bearish phase and it’s anyone’s guess how they will fare over a sustained market downturn (It’s only when the tide is out, do you see who has been swimming naked).
The solutionSo, how can you ensure that the CAGR doesn’t mislead you into making an incorrect investment decision? Quite simple. Don’t accord the past performance numbers more importance than they deserve. Sure, it’s an important parameter, but certainly not the only one or the one to be considered in isolation.
Find out how the fund fares when compared to its peers and benchmark index. Evaluate the fund on parameters like volatility control and risk-adjusted return. Study the fund’s portfolio over longer time frames. Find out if the fund has adhered to its investment mandate and if it has a steady investment style that has worked for it over the long-term and across market cycles (particularly the downturns).
Evaluating a mutual fund is easier said than done. Ensure that factors like past performance and CAGR don’t mislead you.
inputs from personalfn.com
Caution - No Back Seat Driving
If you ask us, investing in a mutual fund can be a huge burden off the investor’s back. Why? Because if it weren’t for the mutual fund, the investor would have been investing directly in the equity/debt markets on his own. That is why at Personalfn, we find it surprising when mutual fund investors begin questioning their fund manager’s investment decisions as if they know a thing or two about investing that their fund manager doesn’t.
The merits of mutual fund investing have found mention in several books of finance and investment, as also on Personalfn; it’s time to revisit them, to remind the investor why he invested in a mutual fund in the first place. As an investor you have probably invested in a mutual fund for one (or all) of these reasons:
1) You want to grow your money through investments in equity/debt markets but do not have the time and expertise to do it on your own.
2) You want to invest in equity/debt markets; you have the time and expertise to make the investments but aren’t sure if you will be able to do so over the long-term.
3) Regardless of whether you have the time or expertise, you prefer mutual funds for the sheer breadth of investment options like equity funds, debt funds, tax-saving funds (equity-linked saving schemes – ELSS) and hybrid funds (balanced funds, monthly income plans – MIPs) among others. The convenience of investing offered by mutual funds through options like systematic investment plans (SIPs) only enhances the investment experience.
Notice that most investors prefer mutual funds because they face serious constraints on their time. They have either little or no inclination to research their investments and even when they have the inclination, they aren’t sure how long they can keep up with the demands of investing.
Investors who invest directly in equity/debt markets will vouch for the demands of investing that we are referring to over here. To be a successful investor:
a) You have to research and then form a view on among other areas – the economy, markets and interest rates at a global and domestic level.
b) Having understood this, you have to identify sectors and companies that are best placed to generate above-average growth over the long-term.
c) Having identified these sectors and companies you have to keep on researching/tracking them on a regular basis to test your original premise of investing in these sectors and companies.
It is apparent that researching/investing is ‘exclusive’ in the sense that not everyone can claim to be good at it or even have the time for it. This is because of the sheer volume of research and analysis that must be done before arriving at a ‘simple’ investment decision. Fund houses recognise the gravity of the situation, which is why they have a team of analysts that assist the fund manager. Put together, there are a lot of people working to ensure that the investor’s money is invested in the right avenues.
A lot of investors must be wondering why we are saying this because they probably know it already. We are wondering the same thing – if investors already know this, why do they question the fund manager’s investment decisions despite knowing that he knows more about investing and finance than them; and that is the reason why he is managing their money and not the other way round.
For some time now, at Personalfn, we have seen investors question their fund manager’s decision to invest in software/technology companies despite the rising rupee. We think we should give some credit to fund managers; if the lay investor can see the impact of the rising rupee on the profitability of software companies, then the fund manager probably saw this even earlier. If despite this the fund manager chooses to invest/remain invested in software companies it’s probably because unlike the lay investor he can foresee some events (based on his research) that are not foreseen by the investor (due to lack of research). In such a situation, the investor must trust his fund manager with his investment decisions instead of second-guessing him. If the investor doesn’t trust his fund manager with his investment calls, then he either needs to learn to trust him or exit the mutual fund completely.
We are not saying that investors must trust their fund managers blindly. However, once they have identified a mutual fund for investment, they need to have a certain level of confidence in their fund manager’s investment decisions. Of course, the decision to invest in a mutual fund must never be taken frivolously. It’s a decision that must be taken after consulting an honest and competent financial planner, who will shortlist the mutual funds that are best suited for the investor. Once that is done, it’s the fund manager’s job to take care of the investments and the financial planner’s job to track the performance and investment decisions of the mutual fund. The investor on his part should refrain from ‘backseat’ fund management.
The merits of mutual fund investing have found mention in several books of finance and investment, as also on Personalfn; it’s time to revisit them, to remind the investor why he invested in a mutual fund in the first place. As an investor you have probably invested in a mutual fund for one (or all) of these reasons:
1) You want to grow your money through investments in equity/debt markets but do not have the time and expertise to do it on your own.
2) You want to invest in equity/debt markets; you have the time and expertise to make the investments but aren’t sure if you will be able to do so over the long-term.
3) Regardless of whether you have the time or expertise, you prefer mutual funds for the sheer breadth of investment options like equity funds, debt funds, tax-saving funds (equity-linked saving schemes – ELSS) and hybrid funds (balanced funds, monthly income plans – MIPs) among others. The convenience of investing offered by mutual funds through options like systematic investment plans (SIPs) only enhances the investment experience.
Notice that most investors prefer mutual funds because they face serious constraints on their time. They have either little or no inclination to research their investments and even when they have the inclination, they aren’t sure how long they can keep up with the demands of investing.
Investors who invest directly in equity/debt markets will vouch for the demands of investing that we are referring to over here. To be a successful investor:
a) You have to research and then form a view on among other areas – the economy, markets and interest rates at a global and domestic level.
b) Having understood this, you have to identify sectors and companies that are best placed to generate above-average growth over the long-term.
c) Having identified these sectors and companies you have to keep on researching/tracking them on a regular basis to test your original premise of investing in these sectors and companies.
It is apparent that researching/investing is ‘exclusive’ in the sense that not everyone can claim to be good at it or even have the time for it. This is because of the sheer volume of research and analysis that must be done before arriving at a ‘simple’ investment decision. Fund houses recognise the gravity of the situation, which is why they have a team of analysts that assist the fund manager. Put together, there are a lot of people working to ensure that the investor’s money is invested in the right avenues.
A lot of investors must be wondering why we are saying this because they probably know it already. We are wondering the same thing – if investors already know this, why do they question the fund manager’s investment decisions despite knowing that he knows more about investing and finance than them; and that is the reason why he is managing their money and not the other way round.
For some time now, at Personalfn, we have seen investors question their fund manager’s decision to invest in software/technology companies despite the rising rupee. We think we should give some credit to fund managers; if the lay investor can see the impact of the rising rupee on the profitability of software companies, then the fund manager probably saw this even earlier. If despite this the fund manager chooses to invest/remain invested in software companies it’s probably because unlike the lay investor he can foresee some events (based on his research) that are not foreseen by the investor (due to lack of research). In such a situation, the investor must trust his fund manager with his investment decisions instead of second-guessing him. If the investor doesn’t trust his fund manager with his investment calls, then he either needs to learn to trust him or exit the mutual fund completely.
We are not saying that investors must trust their fund managers blindly. However, once they have identified a mutual fund for investment, they need to have a certain level of confidence in their fund manager’s investment decisions. Of course, the decision to invest in a mutual fund must never be taken frivolously. It’s a decision that must be taken after consulting an honest and competent financial planner, who will shortlist the mutual funds that are best suited for the investor. Once that is done, it’s the fund manager’s job to take care of the investments and the financial planner’s job to track the performance and investment decisions of the mutual fund. The investor on his part should refrain from ‘backseat’ fund management.
MF Past Performance - not a sure shot
If you are a type of investor who goes through the fact sheet or offer document, in order to study a particular scheme before investing in it, you would have come across a disclaimer (below the scheme’s historical returns) stating, “past performance may or may not be sustained in future and should not be used as a basis for comparison with other investments”. According to SEBI (Securities and Exchange Board of India) guidelines, fund houses must state this disclaimer explicitly whenever they mention the past performance of a scheme. As usual, this guideline came into force because fund houses were mis-selling their schemes based solely on the past performance.
However, disclaimers apart, as a practice investors continue to make investments based on a scheme’s past performance. To make matters worse, fund houses are only too pleased to toe the line by actively advertising the past performance of their schemes leading investors to conclude that it is the single-most important parameter (if not the most important one) to be considered while investing in a mutual fund scheme.
The marketing tactic of playing the ‘past performance card’ at frequent intervals inevitably raises the question - is past performance the only parameter to be considered while investing in mutual fund scheme? In our view – No. Let’s see why at Personalfn we are so adamant about this point.
Relevance of past performancePast performance of a particular scheme simply informs you, the investor, how much return the mutual fund scheme has generated over a time frame. However, there are certain critical points that the past performance numbers in isolation do not tell. We discuss these points below:
a) The risk the investor has been exposed to in the mutual fund’s quest for growth. In a rising market, it is not altogether difficult to clock higher growth if the fund manager is willing to take on higher risk (we have seen this on several occasions like the tech rally in 1999-early 2000, the mid cap rally in 2003-05). In that case, the past performance numbers in isolation will be inaccurate because they do not give investors any inkling of the higher risk they have been exposed to. At Personalfn, we believe that before investing in any investment, it must be evaluated based on the risk-return criterion; evaluating it across any one of them (risk or return) will not serve the purpose as the investor will ultimately end up investing in avenue that is not completely suited to him.
b) Even while showcasing past performance, funds are careful to show the compounded annualised growth rate (CAGR) numbers over longer time frames (3-5 years). Over this extended time frame, a CAGR figure is not entirely representative of the ups and downs (which could be considerable given the extended time frame) witnessed by the mutual fund over that period. This is because the CAGR number tends to even out the fund’s performance over the long-term and the bad times (based on wrong investment calls) are not that easily discernible.
A statistic that underlines, how much a mutual fund has fallen during a particular market slump (as compared to the benchmark index and peers) or how it has performed during a particular calendar year, is far more illustrative in our view as opposed to just a CAGR figure; after a market rally, a CAGR figure looks much better than it did before.
c) Another reason why past performance is not entirely representative of a mutual fund’s ‘good showing’ is because; it does not take into consideration the performance of its peers. It is possible that a fund has performed reasonably well (across relevant parameters) by itself, but hasn’t quite made the mark when compared to its peers. In other words, some of its peers that have outperformed it deserve to be considered by investors before the mutual fund under question. At Personalfn, we compare an investment (be it a mutual fund, fixed deposit, unit-linked insurance plan – ULIP, among others) with its comparable peer group before giving a view on whether or not you should invest in it.
d) Past performance fails to highlight the investment processes and approach pursued by the fund house. It does not give the investor an idea whether the past performance is the result of 1) good fortune/luck 2) a star fund manager 3) a team-based investment approach that takes decisions based on well-defined processes that are not over-dependent on a particular individual (like a star fund manager). At Personalfn, our preference is for Point 3); unfortunately the marketing campaign doesn’t help us with that information, this we learn after constant interaction with fund houses and their investment teams.
e) Past performance often ignores the change in guard or mandate. Fund houses first talk of a star fund manager who was instrumental in sprucing up their performance. They get a lot of money based on this star fund manager. The performance numbers that are advertised are attributed to the ‘brilliance’ of the star fund manager. When the star fund manager quits (which in many cases is often a matter of time), the fund house continues to use the performance attributable to the ex-fund manager to draw fresh monies under the new (star) fund manager! Investors however, are clueless as to whether the performance being advertised is the result of the existing team or an older team.
On the same lines, a mutual fund that revises its mandate/investment objective continues to use the performance figures under the older mandate/investment objective. Again, investors have absolutely no idea whether the performance numbers correspond to the revised mandate or an older mandate.
In an article we wrote earlier, we had addressed this particular issue in detail and had recommended that fund houses either stop using older, irrelevant performance numbers or mention that the performance came under the previous fund management team or an older investment mandate.
f) Of course, last but not the least, past performance is no guarantee of future performance. While this is adequately mentioned in the advertisements, we wonder why it needs to be advertised in the first place. It’s a bit like advertising tobacco products freely with a small disclaimer at the bottom!!
Nonetheless this disclaimer is important; we have mentioned it right at the end because we believe that the 5 points discussed earlier are a lot more important.
What should investors do?Our advice to investors is that they should adhere to the basics of mutual fund investing. They should evaluate mutual funds across parameters, including of course past performance, before considering any investments.
In our view, SEBI, as a regulator of Indian stock markets, should take note of such campaigns and discourage fund houses from misguiding investors through such misrepresentative and inaccurate advertisements.
Till then we can only hope that, unlike on previous occasions when such one-off cases started trends in the mutual fund industry, this particular problem is nipped in the bud by the regulator at the earliest.
However, disclaimers apart, as a practice investors continue to make investments based on a scheme’s past performance. To make matters worse, fund houses are only too pleased to toe the line by actively advertising the past performance of their schemes leading investors to conclude that it is the single-most important parameter (if not the most important one) to be considered while investing in a mutual fund scheme.
The marketing tactic of playing the ‘past performance card’ at frequent intervals inevitably raises the question - is past performance the only parameter to be considered while investing in mutual fund scheme? In our view – No. Let’s see why at Personalfn we are so adamant about this point.
Relevance of past performancePast performance of a particular scheme simply informs you, the investor, how much return the mutual fund scheme has generated over a time frame. However, there are certain critical points that the past performance numbers in isolation do not tell. We discuss these points below:
a) The risk the investor has been exposed to in the mutual fund’s quest for growth. In a rising market, it is not altogether difficult to clock higher growth if the fund manager is willing to take on higher risk (we have seen this on several occasions like the tech rally in 1999-early 2000, the mid cap rally in 2003-05). In that case, the past performance numbers in isolation will be inaccurate because they do not give investors any inkling of the higher risk they have been exposed to. At Personalfn, we believe that before investing in any investment, it must be evaluated based on the risk-return criterion; evaluating it across any one of them (risk or return) will not serve the purpose as the investor will ultimately end up investing in avenue that is not completely suited to him.
b) Even while showcasing past performance, funds are careful to show the compounded annualised growth rate (CAGR) numbers over longer time frames (3-5 years). Over this extended time frame, a CAGR figure is not entirely representative of the ups and downs (which could be considerable given the extended time frame) witnessed by the mutual fund over that period. This is because the CAGR number tends to even out the fund’s performance over the long-term and the bad times (based on wrong investment calls) are not that easily discernible.
A statistic that underlines, how much a mutual fund has fallen during a particular market slump (as compared to the benchmark index and peers) or how it has performed during a particular calendar year, is far more illustrative in our view as opposed to just a CAGR figure; after a market rally, a CAGR figure looks much better than it did before.
c) Another reason why past performance is not entirely representative of a mutual fund’s ‘good showing’ is because; it does not take into consideration the performance of its peers. It is possible that a fund has performed reasonably well (across relevant parameters) by itself, but hasn’t quite made the mark when compared to its peers. In other words, some of its peers that have outperformed it deserve to be considered by investors before the mutual fund under question. At Personalfn, we compare an investment (be it a mutual fund, fixed deposit, unit-linked insurance plan – ULIP, among others) with its comparable peer group before giving a view on whether or not you should invest in it.
d) Past performance fails to highlight the investment processes and approach pursued by the fund house. It does not give the investor an idea whether the past performance is the result of 1) good fortune/luck 2) a star fund manager 3) a team-based investment approach that takes decisions based on well-defined processes that are not over-dependent on a particular individual (like a star fund manager). At Personalfn, our preference is for Point 3); unfortunately the marketing campaign doesn’t help us with that information, this we learn after constant interaction with fund houses and their investment teams.
e) Past performance often ignores the change in guard or mandate. Fund houses first talk of a star fund manager who was instrumental in sprucing up their performance. They get a lot of money based on this star fund manager. The performance numbers that are advertised are attributed to the ‘brilliance’ of the star fund manager. When the star fund manager quits (which in many cases is often a matter of time), the fund house continues to use the performance attributable to the ex-fund manager to draw fresh monies under the new (star) fund manager! Investors however, are clueless as to whether the performance being advertised is the result of the existing team or an older team.
On the same lines, a mutual fund that revises its mandate/investment objective continues to use the performance figures under the older mandate/investment objective. Again, investors have absolutely no idea whether the performance numbers correspond to the revised mandate or an older mandate.
In an article we wrote earlier, we had addressed this particular issue in detail and had recommended that fund houses either stop using older, irrelevant performance numbers or mention that the performance came under the previous fund management team or an older investment mandate.
f) Of course, last but not the least, past performance is no guarantee of future performance. While this is adequately mentioned in the advertisements, we wonder why it needs to be advertised in the first place. It’s a bit like advertising tobacco products freely with a small disclaimer at the bottom!!
Nonetheless this disclaimer is important; we have mentioned it right at the end because we believe that the 5 points discussed earlier are a lot more important.
What should investors do?Our advice to investors is that they should adhere to the basics of mutual fund investing. They should evaluate mutual funds across parameters, including of course past performance, before considering any investments.
In our view, SEBI, as a regulator of Indian stock markets, should take note of such campaigns and discourage fund houses from misguiding investors through such misrepresentative and inaccurate advertisements.
Till then we can only hope that, unlike on previous occasions when such one-off cases started trends in the mutual fund industry, this particular problem is nipped in the bud by the regulator at the earliest.
Don't go by the Mutual Fund Ratings
We have noticed that often, investors consider a lot of parameters in isolation while making investments in mutual funds. In the past, we have delved on some of these parameters viz. past performance, fund manager, performance on compounded annualised growth rate (CAGR). In this article, we discuss another parameter that leaves investors all starry-eyed – mutual fund ratings. We have given our view on ratings and also how Morningstar, a pioneer of sorts in mutual fund ratings, considers its own ratings.
For some time now, Indian mutual fund investors have taken a fancy for star ratings that are accorded by select mutual fund research firms/agencies. These firms, based on certain pre-determined parameters, give a rating (often by way of stars, more stars means a better rating) to various mutual funds. Often the rating process is quite complicated, so we find it ironical as to how investors have taken a fancy to them without first understanding how these ratings were arrived at.
Star ratings in the Indian context don’t really do justice to the funds that are rated. To begin with, the ratings are biased towards returns i.e. net asset value appreciation and even then it’s only past performance. Other factors like risk, portfolio diversification, ethics, processes and investment philosophy are either given lower weightage or no weightage at all.
In our view, star ratings in most cases (at least in the Indian context) must be considered with a pinch of salt for the following reasons:
1) Since past performance has such an important role to play in the rating process, the ratings are backward-looking, not forward-looking.
2) Given that returns are a key constituent in the ratings, other factors being the same, a change in the returns usually results in a revision in the rating. For investors, it can be a nightmare to realign their investments in a mutual fund in response to the latest revision in its rating.
3) The ratings do not accord adequate priority to investment processes pursued by a mutual fund. A mutual fund based on its processes may register a certain performance level which may not compare well to another mutual fund, with a superior performance on the back of a star fund manager. In our view, there is a higher risk associated with the mutual fund with a star fund manager that the ratings simply fail to capture. When the star fund manager quits, the mutual fund is left in the lurch and this is most likely to show in its performance. The ratings usually fail to highlight this to the investor.
4) The ratings also fail to highlight the importance of ethics. A fund house (or its star fund manager) that is embroiled in a scam/financial irregularity does not get a ‘negative rating’ on ethics. So a fund house that is performing well on the returns front, although it has been hauled up by regulators for misdemeanours while investing, will still manage to get a high rating based on high returns, albeit at lower ethics. So there is a need to accord an ‘ethics-adjusted return’ which ratings fail to do.
5) Most ratings also ignore transparency and compliance in terms of information flow to investors. A mutual fund that does not give adequate and relevant information to investors in a timely and consistent manner will nonetheless rank highly based on its superior performance. So there are no negative ratings for being investor-unfriendly and no plus points for being investor-friendly.
6) Ratings fail to tell an investor whether or not he should be investing in a fund. There could be a dozen equity funds in a particular peer group, all with 5 star ratings. How is the investor supposed to know, which is the best fund for him? The ratings fail to guide investors on exactly which fund is ideal for their portfolios.
While in India ratings are considered by investors and the rating agencies as fairly conclusive, we would like to draw the attention of our visitors towards how Morningstar, the father of mutual fund ratings, so to speak, considers its own ratings. Morningstar is an international firm that researches mutual funds and stocks. This is what Morningstar has to say about its own ratings:
“As always the Morningstar Rating is intended for use as a first step in the fund evaluation process. A high rating alone is not sufficient basis for investment decisions.”
In our view, this is exactly how these ratings must be treated. They are at best a starting point for investors. They are certainly not the be-all and end-all of mutual fund evaluation. This is a point for consideration for all parties involved – the rating agency that gives the rating, the mutual fund that showcases them and the investor who is impressed by them.
For some time now, Indian mutual fund investors have taken a fancy for star ratings that are accorded by select mutual fund research firms/agencies. These firms, based on certain pre-determined parameters, give a rating (often by way of stars, more stars means a better rating) to various mutual funds. Often the rating process is quite complicated, so we find it ironical as to how investors have taken a fancy to them without first understanding how these ratings were arrived at.
Star ratings in the Indian context don’t really do justice to the funds that are rated. To begin with, the ratings are biased towards returns i.e. net asset value appreciation and even then it’s only past performance. Other factors like risk, portfolio diversification, ethics, processes and investment philosophy are either given lower weightage or no weightage at all.
In our view, star ratings in most cases (at least in the Indian context) must be considered with a pinch of salt for the following reasons:
1) Since past performance has such an important role to play in the rating process, the ratings are backward-looking, not forward-looking.
2) Given that returns are a key constituent in the ratings, other factors being the same, a change in the returns usually results in a revision in the rating. For investors, it can be a nightmare to realign their investments in a mutual fund in response to the latest revision in its rating.
3) The ratings do not accord adequate priority to investment processes pursued by a mutual fund. A mutual fund based on its processes may register a certain performance level which may not compare well to another mutual fund, with a superior performance on the back of a star fund manager. In our view, there is a higher risk associated with the mutual fund with a star fund manager that the ratings simply fail to capture. When the star fund manager quits, the mutual fund is left in the lurch and this is most likely to show in its performance. The ratings usually fail to highlight this to the investor.
4) The ratings also fail to highlight the importance of ethics. A fund house (or its star fund manager) that is embroiled in a scam/financial irregularity does not get a ‘negative rating’ on ethics. So a fund house that is performing well on the returns front, although it has been hauled up by regulators for misdemeanours while investing, will still manage to get a high rating based on high returns, albeit at lower ethics. So there is a need to accord an ‘ethics-adjusted return’ which ratings fail to do.
5) Most ratings also ignore transparency and compliance in terms of information flow to investors. A mutual fund that does not give adequate and relevant information to investors in a timely and consistent manner will nonetheless rank highly based on its superior performance. So there are no negative ratings for being investor-unfriendly and no plus points for being investor-friendly.
6) Ratings fail to tell an investor whether or not he should be investing in a fund. There could be a dozen equity funds in a particular peer group, all with 5 star ratings. How is the investor supposed to know, which is the best fund for him? The ratings fail to guide investors on exactly which fund is ideal for their portfolios.
While in India ratings are considered by investors and the rating agencies as fairly conclusive, we would like to draw the attention of our visitors towards how Morningstar, the father of mutual fund ratings, so to speak, considers its own ratings. Morningstar is an international firm that researches mutual funds and stocks. This is what Morningstar has to say about its own ratings:
“As always the Morningstar Rating is intended for use as a first step in the fund evaluation process. A high rating alone is not sufficient basis for investment decisions.”
In our view, this is exactly how these ratings must be treated. They are at best a starting point for investors. They are certainly not the be-all and end-all of mutual fund evaluation. This is a point for consideration for all parties involved – the rating agency that gives the rating, the mutual fund that showcases them and the investor who is impressed by them.
Mutual Fund FAQs
1.What is a Mutual Fund?
A Mutual Fund is a body corporate registered with the Securities and Exchange Board of India (SEBI) that pools up the money from individual / corporate investors and invests the same on behalf of the investors /unit holders, in equity shares, Government securities, Bonds, Call money markets etc., and distributes the profits. In other words, a mutual fund allows an investor to indirectly take a position in a basket of assets.
2.Which was the First Mutual Fund to be set up in India?
Unit Trust of India is the first Mutual Fund set up under a separate act, UTI Act in 1963, and started its operations in 1964 with the issue of units under the scheme US-64.
3.Who is the Regulatory Body for Mutual Funds?
Securities Exchange Board of India (SEBI) is the regulatory body for all the mutual funds mentioned above. All the mutual funds must get registered with SEBI. The only exception is the UTI, since it is a corporation formed under a separate Act of Parliament.
4.What are the broad guidelines issued for a MF?
SEBI is the regulatory authority of MFs. SEBI has the following broad guidelines pertaining to mutual funds : (1) MFs should be formed as a Trust under Indian Trust Act and should be operated by Asset Management Companies (AMCs). (2) MFs need to set up a Board of Trustees and Trustee Companies. They should also have their Board of Directors. (3) The net worth of the AMCs should be at least Rs.5 crore. (4) AMCs and Trustees of a MF should be two separate and distinct legal entities. (5) The AMC or any of its companies cannot act as managers for any other fund. (6) AMCs have to get the approval of SEBI for its Articles and Memorandum of Association. (7) All MF schemes should be registered with SEBI. (8) MFs should distribute minimum of 90% of their profits among the investors. (9) There are other guidelines also that govern investment strategy, disclosure norms and advertising code for mutual funds.
5.How do mutual funds diversify their risks?
According to basis financial theory, which states that an investor can reduce his total risk by holding a portfolio of assets instead of only one asset. This is because by holding all your money in just one asset, the entire fortunes of your portfolio depend on this one asset. By creating a portfolio of a variety of assets, this risk is substantially reduced.
6.Can mutual funds assumed to be risk-free investments?
No. Mutual fund investments are not totally risk free. In fact, investing in mutual funds contains the same risk as investing in the markets, the only difference being that due to professional management of funds the controllable risks are substantially reduced.
7.What are the types risks involved in investing in mutual funds?
A very important risk involved in mutual fund investments is the market risk. When the market is in doldrums, most of the equity funds will also experience a downturn. However, the company specific risks are largely eliminated due to professional fund management.
8.What are the different types of funds offered by fund house?
Currently there exist balanced funds, Income fund, Growth funds, Sector funds etc. To get more details about the different funds and their features please visit our mutual fund glossary.
9.What are the different types of plans that mutual fund offers?
That depends on the strategy of the concerned scheme. But generally there are 3 broad categories. A dividend plan entails a regular payment of dividend to the investors. A reinvestment plan is a plan where these dividends are reinvested in the scheme itself. A growth plan is one where no dividends are declared and the investor only gains through capital appreciation in the NAV of the fund.
10.What are open-ended and closed-ended mutual funds?
In an open-ended mutual fund there are no limits on the total size of the corpus. Investors are permitted to enter and exit the open-ended mutual fund at any point of time at a price that is linked to the net asset value (NAV). In case of closed-ended funds, the total size of the corpus is limited by the size of the initial offer.
11.What is the investor’s exit route in case of a closed-ended fund?
According to Sebi regulations, all closed-ended funds have to be necessarily listed on a recognized stock exchange. Thus the secondary market provides an exit route in case of closed-ended funds.
12.Why should one choose to invest in a mutual fund?
For retail investor who does not have the time and expertise to analyze and invest in stocks and bonds, mutual funds offer a viable investment alternative. This is because:(1) Mutual Funds provide the benefit of cheap access to expensive stocks (2) Mutual funds diversify the risk of the investor by investing in a basket of assets (3) A team of professional fund managers manages them with in-depth research inputs from investment analysts. (4) Being institutions with good bargaining power in markets, mutual funds have access to crucial corporate information which individual investors cannot access.
13.How investors invest in Mutual Funds?
One can invest by approaching a registered broker of Mutual funds or the respective offices of the Mutual funds in that particular town/city. An application form has to be filled up giving all the particulars along with the cheque or Demand Draft for the amount to be invested.
14.What are the parameters on which a Mutual Fund scheme should be evaluated?
Performance indicators like total returns given by the fund on different schemes, the returns on competing funds, the objective of the fund and the promoter’s image are some of the key factors to be considered while taking an investment decision regarding mutual funds.
15.What is a Systematic Investment Plan and how does it operate?
A systematic investment plan is one where an investor contributes a fixed amount every month and at the prevailing NAV the units are credited to his account. Today many funds are offering this facility.
16.What are the benefits of s Systematic Investment Plan?
A systematic investment plan (SIP) offers 2 major benefits to an investor: (1) It avoids lump sum investment at one point of time (2) In a scenario of falling prices, it reduces your overall cost of acquisition by a process of rupee-cost averaging. This means that (3) at lower prices you end up getting more units for the same investment.
17.What is the difference between mutual funds and portfolio management schemes?
While the concept remains the same of collecting money from investors, pooling them and investing the funds, the target investors are different. In the case of portfolio management the target investors are high networth investors while in case of mutual funds the target investors are the retail investors.
18.Is investor eligible for rebate on income tax by investing in a MF?
Yes in case of certain specific Equity Linked Saving Schemes, tax benefits are available under Section 88 of the Income Tax Act. In such cases the fund prospectuses explicitly states that it is a tax saving fund. In such cases 20% of your contribution will qualify for rebate under Section 88 of the Income Tax Act.
19.Do investments in mutual funds offer tax benefit on capital gains?
Yes. If the capital gains earned by you during a financial year are invested in specified mutual funds then such capital gains are exempt from capital gains tax under Section 54EA and Section 54EB of the Income Tax Act.
20.Do mutual fund investments attract wealth tax?
No. Under the Wealth Tax Act, all financial assets, including mutual fund units are exempt totally from Wealth Tax.
21.If I gift mutual fund units, does it attract gift tax?
No. With effect from 1st October 1998, units of a mutual fund gifted by unitholders are no longer chargeable to Gift Tax.
22.Is dividend earned from mutual funds exempt from income tax?
Yes. Income from mutual funds in the form of dividends is entirely exempt from income tax provided the fund in question is a equity/growth fund where more than 50% of the portfolio is invested in equities.
23.What are my major rights as a unit holder in a mutual fund?
Some important rights are mentioned below: (1) Unit holders have a proportionate right in the beneficial ownership of the assets of the scheme and to the dividend declared. (2) They are entitled to receive dividend warrants within 42 days of the date of declaration of the dividend. (3) They are entitled to receive redemption cheques within 10 working days from the date of redemption. (4) 75% of the unit holders with the prior approval of SEBI can terminate AMC of the fund. (5) 75% of the unit holders can pass a resolution to wind-up the scheme.
24. What is a fund house/family?
A group of funds managed under one umbrella. The most basic fund family would include a stock, bond and money market-portfolio, although many funds have variants like sector funds, balanced funds.
For instance, Zurich India Mutual Fund is a fund house with several funds under it.
25. What are a fund’s net assets?
The total value of a fund's cash and securities less its liabilities or obligations.
26. What is a fund portfolio?
A group of securities held by the mutual fund. A portfolio could be a mixture of stocks, bonds and cash.
27. What is the portfolio turnover of a fund supposed to mean?
A measure of the amount of buying and selling activity in a fund.Turnover is defined as the lesser of securities sold or purchased during a year divided by the average of monthly net assets. A turnover of 100 percent, for example, implies positions are held on average for about a year.
28. How are mutual funds classified?
Mutual Funds can be classified into the following 3 broad categories:
1. Portfolio classification
2. Functional classification
3. Geographical classification
29. How are mutual funds classified based on their portfolios?
Portfolio classification of mutual funds is done on the following basis:
Growth Funds
Investment objective: Capital appreciation of equity shares
Investment avenue: Equity shares of companies with high growth potential
For eg. Morgan Stanley Growth Fund
Income Funds
Investment objective: Providing safety of investments and regular income
Investment avenue: Bonds, debentures and other debt related instruments as well as equity shares of companies with high dividend payouts.
There are 2 aspects of income funds viz. low investment risk with constant income and high investment risk generating high income.
For eg. Templeton Income Fund
Balanced Funds
Investment objective: Modest risk of investment and reasonable rate of return Investment avenue: Judicious mix of equity shares, preference shares as well as bonds, debentures and other debt related instruments.
For eg. GIC Balanced Fund
Money Market Mutual Funds (MMMFs)
Investment objective: To take advantage of the volatility in interest rates in the money market Investment Avenue: Certificate of deposits (CDs), call money market, commercial papers. Investors can participate indirectly in the money market through MMMFs.
For eg. IDBI-PRINCIPAL Money Market Fund 1997
Specialised Funds
Investment Objective: To take advantage of conditions in a particular sector or a specific income producing security
Investment Avenue: Specialised investments in securities of companies in certain sectors or specific income producing securities
For eg. Kothari Pioneer's Internet Opportunities
Fund
Leveraged Funds
Investment objective: To increase the value of the portfolio and benefit the shareholders by gains exceeding the cost of borrowed funds
Investment avenue: Speculative and risky investments, like short sales to take advantage of declining market.
Not common in India
Index Funds
Investment Objective: To increase the value of the portfolio in line with the benchmark index (for eg. BSE Sensex, SP CNX 50)
Investment Avenue: Investments only in those shares that form a part of the benchmark index, in exactly the same proportion, so that the value of the index fund varies in proportion with the benchmark index.
For e.g. UTI Nifty Index Fund
Hedge Funds
Investment Objective: To hedge risks in order to increase the value of the portfolio
Investment Avenue: Employ speculative trading principles - buy rising shares and sell shares whose prices are likely to fall.
Not common in India
30. How are mutual funds classified functionally?
Functional classification of mutual funds is done on the following basis:
Open ended scheme
Investors under this scheme are free to join the fund or withdraw from the fund at any time after an initial lock-in period. Such funds announce sale and repurchase prices from time to time. In an open-ended scheme, investors can resell units in the fund to the issuing mutual fund at the net asset value (NAV) of the units. This is because open-ended schemes are permitted to buy/sell their own units. For e.g. Alliance Capital 1995 Fund
Close-ended scheme
Unlike the open-ended schemes, close-ended schemes do not issue units for repurchase redemption on a periodic basis. Its units can be redeemed only on termination of the scheme, or through dealings in the secondary market. In such schemes, the period of the scheme is specified at the outset. They have a definite target amount for the funds and cannot sell more after initial offering. For eg. UTI Mastergain 1986
31. How are mutual funds classified geographically?
Mutual funds can be classified geographically on the following basis:
Domestic funds
Domestic fund houses launch funds, which mobilise savings of the nationals within the country. These schemes could fall under any of the categories mentioned under portfolio classification and functional classification. Schemes launched by Indian MFs like GIC MF, UTI LIC MF, SBI MF, Canbank MF, Bank of Baroda MF, Bank of India MF, Morgan Stanley, Templeton, Alliance.
Offshore Funds
Offshore funds can invest in securities of foreign companies, after requisite permission from RBI. The objective behind launching offshore funds is to attract foreign capital for investment in the country of the issuing company. These funds facilitate cross border fund flow, which is a direct route for getting foreign currency. From the investment point of view, Offshore funds open up domestic capital markets to the international investors and global portfolio investments.
32. What are the different plans that mutual funds offer?
Mutual Funds in order to cater to a range of investors, have various investment plans. Some of the important investment plans include:
Growth Plan
Under the Growth Plan, the investor realises only the capital appreciation on the investment (by an increase in NAV) and does not get any income in the form of dividend.
Income Plan
Under the Income Plan, the investor realises income in the form of dividend. However his NAV will fall to the extent of the dividend.
Dividend Re-investment Plan
Here the dividend accrued on mutual funds is automatically re-invested in purchasing additional units in open-ended funds. In most cases mutual funds offer the investor an option of collecting dividends or re-investing the same.
Systematic Investment Plan (SIP)
Here the investor is given the option of preparing a pre-determined number of post-dated cheques in favour of the fund. He will get units on the date of the cheque at the existing NAV. For instance, if on 25th March, he has given a post-dated cheque for June 25th, he will get units on 25th June at existing NAV.
Systematic Withdrawal Plan
As opposed to the Systematic Investment Plan, the Systematic Withdrawal Plan allows the investor the facility to withdraw a pre-determined amount/units from his fund at a pre-determined interval. The investor’s units will be redeemed at the existing NAV as on that day.
Retirement Pension Plan
Some schemes are linked with retirement pension. Individuals participate in these plans for themselves, and corporates for their employees.
Insurance Plan
Some schemes launched by UTI and LIC offer insurance cover to investors.
33. Who is a custodian?
The custodian, an independent organisation, has the physical possession of all securities purchased by the mutual fund, and undertakes responsibility for its handling and safekeeping. For instance, the Stock Holding Corporation of India Ltd (SCHIL) is the custodian for most fund houses in the country.
34. What is an Asset Management Company (AMC)?
A highly regulated organisation that pools money from many people into a portfolio structured to achieve certain objectives. Hence it is termed as an Asset Management Company. Typically an AMC manages several funds - open-end /closed-end across several categories - growth, income, balanced. Every mutual fund has an AMC associated with it.
For instance, Alliance Capital Mutual Fund is associated with Alliance Capital Asset Management Company Ltd.
35. What is load?
It is a charge collected by a mutual fund when it sells units. It can be either front-end load (i.e., the charge is collected when an investor buys the units) or back-end load (i.e, the charge collected when the investor sells back the units). Some schemes do not charge any load and are called No Load Schemes
36. What is an ex-dividend date?
Normally, one business day after the record date. Investors purchasing unit on or after the ex-dividend date are not entitled to collect dividends or bonus units. The NAV falls by the amount of the dividend distributed and/or bonus issued. The terms ex-bonus and ex-dividend often are used synonymously.
For instance, if the record date for dividend is October 15th, then investors who don’t have their names in the list of unitholders as on that day, will not receive dividend. This works very similar to dividend and bonus declarations in the case of stocks.
37. What is an asset management fee?
The fee charged by the asset management company (AMC) for portfolio management. The fee charged on an annual basis is calculated as percentage of net assets under management.
A Mutual Fund is a body corporate registered with the Securities and Exchange Board of India (SEBI) that pools up the money from individual / corporate investors and invests the same on behalf of the investors /unit holders, in equity shares, Government securities, Bonds, Call money markets etc., and distributes the profits. In other words, a mutual fund allows an investor to indirectly take a position in a basket of assets.
2.Which was the First Mutual Fund to be set up in India?
Unit Trust of India is the first Mutual Fund set up under a separate act, UTI Act in 1963, and started its operations in 1964 with the issue of units under the scheme US-64.
3.Who is the Regulatory Body for Mutual Funds?
Securities Exchange Board of India (SEBI) is the regulatory body for all the mutual funds mentioned above. All the mutual funds must get registered with SEBI. The only exception is the UTI, since it is a corporation formed under a separate Act of Parliament.
4.What are the broad guidelines issued for a MF?
SEBI is the regulatory authority of MFs. SEBI has the following broad guidelines pertaining to mutual funds : (1) MFs should be formed as a Trust under Indian Trust Act and should be operated by Asset Management Companies (AMCs). (2) MFs need to set up a Board of Trustees and Trustee Companies. They should also have their Board of Directors. (3) The net worth of the AMCs should be at least Rs.5 crore. (4) AMCs and Trustees of a MF should be two separate and distinct legal entities. (5) The AMC or any of its companies cannot act as managers for any other fund. (6) AMCs have to get the approval of SEBI for its Articles and Memorandum of Association. (7) All MF schemes should be registered with SEBI. (8) MFs should distribute minimum of 90% of their profits among the investors. (9) There are other guidelines also that govern investment strategy, disclosure norms and advertising code for mutual funds.
5.How do mutual funds diversify their risks?
According to basis financial theory, which states that an investor can reduce his total risk by holding a portfolio of assets instead of only one asset. This is because by holding all your money in just one asset, the entire fortunes of your portfolio depend on this one asset. By creating a portfolio of a variety of assets, this risk is substantially reduced.
6.Can mutual funds assumed to be risk-free investments?
No. Mutual fund investments are not totally risk free. In fact, investing in mutual funds contains the same risk as investing in the markets, the only difference being that due to professional management of funds the controllable risks are substantially reduced.
7.What are the types risks involved in investing in mutual funds?
A very important risk involved in mutual fund investments is the market risk. When the market is in doldrums, most of the equity funds will also experience a downturn. However, the company specific risks are largely eliminated due to professional fund management.
8.What are the different types of funds offered by fund house?
Currently there exist balanced funds, Income fund, Growth funds, Sector funds etc. To get more details about the different funds and their features please visit our mutual fund glossary.
9.What are the different types of plans that mutual fund offers?
That depends on the strategy of the concerned scheme. But generally there are 3 broad categories. A dividend plan entails a regular payment of dividend to the investors. A reinvestment plan is a plan where these dividends are reinvested in the scheme itself. A growth plan is one where no dividends are declared and the investor only gains through capital appreciation in the NAV of the fund.
10.What are open-ended and closed-ended mutual funds?
In an open-ended mutual fund there are no limits on the total size of the corpus. Investors are permitted to enter and exit the open-ended mutual fund at any point of time at a price that is linked to the net asset value (NAV). In case of closed-ended funds, the total size of the corpus is limited by the size of the initial offer.
11.What is the investor’s exit route in case of a closed-ended fund?
According to Sebi regulations, all closed-ended funds have to be necessarily listed on a recognized stock exchange. Thus the secondary market provides an exit route in case of closed-ended funds.
12.Why should one choose to invest in a mutual fund?
For retail investor who does not have the time and expertise to analyze and invest in stocks and bonds, mutual funds offer a viable investment alternative. This is because:(1) Mutual Funds provide the benefit of cheap access to expensive stocks (2) Mutual funds diversify the risk of the investor by investing in a basket of assets (3) A team of professional fund managers manages them with in-depth research inputs from investment analysts. (4) Being institutions with good bargaining power in markets, mutual funds have access to crucial corporate information which individual investors cannot access.
13.How investors invest in Mutual Funds?
One can invest by approaching a registered broker of Mutual funds or the respective offices of the Mutual funds in that particular town/city. An application form has to be filled up giving all the particulars along with the cheque or Demand Draft for the amount to be invested.
14.What are the parameters on which a Mutual Fund scheme should be evaluated?
Performance indicators like total returns given by the fund on different schemes, the returns on competing funds, the objective of the fund and the promoter’s image are some of the key factors to be considered while taking an investment decision regarding mutual funds.
15.What is a Systematic Investment Plan and how does it operate?
A systematic investment plan is one where an investor contributes a fixed amount every month and at the prevailing NAV the units are credited to his account. Today many funds are offering this facility.
16.What are the benefits of s Systematic Investment Plan?
A systematic investment plan (SIP) offers 2 major benefits to an investor: (1) It avoids lump sum investment at one point of time (2) In a scenario of falling prices, it reduces your overall cost of acquisition by a process of rupee-cost averaging. This means that (3) at lower prices you end up getting more units for the same investment.
17.What is the difference between mutual funds and portfolio management schemes?
While the concept remains the same of collecting money from investors, pooling them and investing the funds, the target investors are different. In the case of portfolio management the target investors are high networth investors while in case of mutual funds the target investors are the retail investors.
18.Is investor eligible for rebate on income tax by investing in a MF?
Yes in case of certain specific Equity Linked Saving Schemes, tax benefits are available under Section 88 of the Income Tax Act. In such cases the fund prospectuses explicitly states that it is a tax saving fund. In such cases 20% of your contribution will qualify for rebate under Section 88 of the Income Tax Act.
19.Do investments in mutual funds offer tax benefit on capital gains?
Yes. If the capital gains earned by you during a financial year are invested in specified mutual funds then such capital gains are exempt from capital gains tax under Section 54EA and Section 54EB of the Income Tax Act.
20.Do mutual fund investments attract wealth tax?
No. Under the Wealth Tax Act, all financial assets, including mutual fund units are exempt totally from Wealth Tax.
21.If I gift mutual fund units, does it attract gift tax?
No. With effect from 1st October 1998, units of a mutual fund gifted by unitholders are no longer chargeable to Gift Tax.
22.Is dividend earned from mutual funds exempt from income tax?
Yes. Income from mutual funds in the form of dividends is entirely exempt from income tax provided the fund in question is a equity/growth fund where more than 50% of the portfolio is invested in equities.
23.What are my major rights as a unit holder in a mutual fund?
Some important rights are mentioned below: (1) Unit holders have a proportionate right in the beneficial ownership of the assets of the scheme and to the dividend declared. (2) They are entitled to receive dividend warrants within 42 days of the date of declaration of the dividend. (3) They are entitled to receive redemption cheques within 10 working days from the date of redemption. (4) 75% of the unit holders with the prior approval of SEBI can terminate AMC of the fund. (5) 75% of the unit holders can pass a resolution to wind-up the scheme.
24. What is a fund house/family?
A group of funds managed under one umbrella. The most basic fund family would include a stock, bond and money market-portfolio, although many funds have variants like sector funds, balanced funds.
For instance, Zurich India Mutual Fund is a fund house with several funds under it.
25. What are a fund’s net assets?
The total value of a fund's cash and securities less its liabilities or obligations.
26. What is a fund portfolio?
A group of securities held by the mutual fund. A portfolio could be a mixture of stocks, bonds and cash.
27. What is the portfolio turnover of a fund supposed to mean?
A measure of the amount of buying and selling activity in a fund.Turnover is defined as the lesser of securities sold or purchased during a year divided by the average of monthly net assets. A turnover of 100 percent, for example, implies positions are held on average for about a year.
28. How are mutual funds classified?
Mutual Funds can be classified into the following 3 broad categories:
1. Portfolio classification
2. Functional classification
3. Geographical classification
29. How are mutual funds classified based on their portfolios?
Portfolio classification of mutual funds is done on the following basis:
Growth Funds
Investment objective: Capital appreciation of equity shares
Investment avenue: Equity shares of companies with high growth potential
For eg. Morgan Stanley Growth Fund
Income Funds
Investment objective: Providing safety of investments and regular income
Investment avenue: Bonds, debentures and other debt related instruments as well as equity shares of companies with high dividend payouts.
There are 2 aspects of income funds viz. low investment risk with constant income and high investment risk generating high income.
For eg. Templeton Income Fund
Balanced Funds
Investment objective: Modest risk of investment and reasonable rate of return Investment avenue: Judicious mix of equity shares, preference shares as well as bonds, debentures and other debt related instruments.
For eg. GIC Balanced Fund
Money Market Mutual Funds (MMMFs)
Investment objective: To take advantage of the volatility in interest rates in the money market Investment Avenue: Certificate of deposits (CDs), call money market, commercial papers. Investors can participate indirectly in the money market through MMMFs.
For eg. IDBI-PRINCIPAL Money Market Fund 1997
Specialised Funds
Investment Objective: To take advantage of conditions in a particular sector or a specific income producing security
Investment Avenue: Specialised investments in securities of companies in certain sectors or specific income producing securities
For eg. Kothari Pioneer's Internet Opportunities
Fund
Leveraged Funds
Investment objective: To increase the value of the portfolio and benefit the shareholders by gains exceeding the cost of borrowed funds
Investment avenue: Speculative and risky investments, like short sales to take advantage of declining market.
Not common in India
Index Funds
Investment Objective: To increase the value of the portfolio in line with the benchmark index (for eg. BSE Sensex, SP CNX 50)
Investment Avenue: Investments only in those shares that form a part of the benchmark index, in exactly the same proportion, so that the value of the index fund varies in proportion with the benchmark index.
For e.g. UTI Nifty Index Fund
Hedge Funds
Investment Objective: To hedge risks in order to increase the value of the portfolio
Investment Avenue: Employ speculative trading principles - buy rising shares and sell shares whose prices are likely to fall.
Not common in India
30. How are mutual funds classified functionally?
Functional classification of mutual funds is done on the following basis:
Open ended scheme
Investors under this scheme are free to join the fund or withdraw from the fund at any time after an initial lock-in period. Such funds announce sale and repurchase prices from time to time. In an open-ended scheme, investors can resell units in the fund to the issuing mutual fund at the net asset value (NAV) of the units. This is because open-ended schemes are permitted to buy/sell their own units. For e.g. Alliance Capital 1995 Fund
Close-ended scheme
Unlike the open-ended schemes, close-ended schemes do not issue units for repurchase redemption on a periodic basis. Its units can be redeemed only on termination of the scheme, or through dealings in the secondary market. In such schemes, the period of the scheme is specified at the outset. They have a definite target amount for the funds and cannot sell more after initial offering. For eg. UTI Mastergain 1986
31. How are mutual funds classified geographically?
Mutual funds can be classified geographically on the following basis:
Domestic funds
Domestic fund houses launch funds, which mobilise savings of the nationals within the country. These schemes could fall under any of the categories mentioned under portfolio classification and functional classification. Schemes launched by Indian MFs like GIC MF, UTI LIC MF, SBI MF, Canbank MF, Bank of Baroda MF, Bank of India MF, Morgan Stanley, Templeton, Alliance.
Offshore Funds
Offshore funds can invest in securities of foreign companies, after requisite permission from RBI. The objective behind launching offshore funds is to attract foreign capital for investment in the country of the issuing company. These funds facilitate cross border fund flow, which is a direct route for getting foreign currency. From the investment point of view, Offshore funds open up domestic capital markets to the international investors and global portfolio investments.
32. What are the different plans that mutual funds offer?
Mutual Funds in order to cater to a range of investors, have various investment plans. Some of the important investment plans include:
Growth Plan
Under the Growth Plan, the investor realises only the capital appreciation on the investment (by an increase in NAV) and does not get any income in the form of dividend.
Income Plan
Under the Income Plan, the investor realises income in the form of dividend. However his NAV will fall to the extent of the dividend.
Dividend Re-investment Plan
Here the dividend accrued on mutual funds is automatically re-invested in purchasing additional units in open-ended funds. In most cases mutual funds offer the investor an option of collecting dividends or re-investing the same.
Systematic Investment Plan (SIP)
Here the investor is given the option of preparing a pre-determined number of post-dated cheques in favour of the fund. He will get units on the date of the cheque at the existing NAV. For instance, if on 25th March, he has given a post-dated cheque for June 25th, he will get units on 25th June at existing NAV.
Systematic Withdrawal Plan
As opposed to the Systematic Investment Plan, the Systematic Withdrawal Plan allows the investor the facility to withdraw a pre-determined amount/units from his fund at a pre-determined interval. The investor’s units will be redeemed at the existing NAV as on that day.
Retirement Pension Plan
Some schemes are linked with retirement pension. Individuals participate in these plans for themselves, and corporates for their employees.
Insurance Plan
Some schemes launched by UTI and LIC offer insurance cover to investors.
33. Who is a custodian?
The custodian, an independent organisation, has the physical possession of all securities purchased by the mutual fund, and undertakes responsibility for its handling and safekeeping. For instance, the Stock Holding Corporation of India Ltd (SCHIL) is the custodian for most fund houses in the country.
34. What is an Asset Management Company (AMC)?
A highly regulated organisation that pools money from many people into a portfolio structured to achieve certain objectives. Hence it is termed as an Asset Management Company. Typically an AMC manages several funds - open-end /closed-end across several categories - growth, income, balanced. Every mutual fund has an AMC associated with it.
For instance, Alliance Capital Mutual Fund is associated with Alliance Capital Asset Management Company Ltd.
35. What is load?
It is a charge collected by a mutual fund when it sells units. It can be either front-end load (i.e., the charge is collected when an investor buys the units) or back-end load (i.e, the charge collected when the investor sells back the units). Some schemes do not charge any load and are called No Load Schemes
36. What is an ex-dividend date?
Normally, one business day after the record date. Investors purchasing unit on or after the ex-dividend date are not entitled to collect dividends or bonus units. The NAV falls by the amount of the dividend distributed and/or bonus issued. The terms ex-bonus and ex-dividend often are used synonymously.
For instance, if the record date for dividend is October 15th, then investors who don’t have their names in the list of unitholders as on that day, will not receive dividend. This works very similar to dividend and bonus declarations in the case of stocks.
37. What is an asset management fee?
The fee charged by the asset management company (AMC) for portfolio management. The fee charged on an annual basis is calculated as percentage of net assets under management.
Why Mutual Funds
Ok, enuff of gyaan on MFs. Now, i know they are fairy. But will they be good to me. Why should i go with them.
Professional Money Management
Fund managers are responsible for implementing a consistent investment strategy that reflects the goals of the fund. Fund managers monitor market and economic trends and analyze securities in order to make informed investment decisions.
Diversification
Diversification is one of the best ways to reduce risk (to understand why, read The need to Diversify). Mutual funds offer investors an opportunity to diversify across assets depending on their investment needs.
Liquidity
Investors can sell their mutual fund units on any business day and receive the current market value on their investments within a short time period (normally three- to five-days).
Affordability
The minimum initial investment for a mutual fund is fairly low for most funds (as low as Rs500 for some schemes).
Convenience
Most private sector funds provide you the convenience of periodic purchase plans, automatic withdrawal plans and the automatic reinvestment of interest and dividends.Mutual funds also provide you with detailed reports and statements that make record-keeping simple. You can easily monitor the performance of your mutual funds simply by reviewing the business pages of most newspapers or by using our Mutual Funds section in Investor’s Mall.
Flexibility and variety
You can pick from conservative, blue-chip stock funds, sectoral funds, funds that aim to provide income with modest growth or those that take big risks in the search for returns. You can even buy balanced funds, or those that combine stocks and bonds in the samefund.
Tax benefits on Investment in Mutual Funds (in India)
1) 100% Income Tax exemption on all Mutual Fund dividends2) Capital Gains Tax to be lower of - 10% on the capital gains without factoring indexation benefit and 20% on the capital gains after factoring indexation benefit.3) Open-end funds with equity exposure of more than 50% are exempt from the payment of dividend tax for a period of 3 years from 1999-2000
Economies of Scale
Mutual fund buy and sell large amounts of securities at a time, thus help to reducing transaction costs, and help to bring down the average cost of the unit for their investors.
Though i didn't want to write this piece ...but let's be fair ..
Disadvantages of Investing Mutual Funds:
1. Professional Management-Some funds doesn’t perform in neither the market, as their management is not dynamic enough to explore the available opportunity in the market, thus many investors debate over whether or not the so-called professionals are any better than mutual fund or investor him self, for picking up stocks.
2. Costs – The biggest source of AMC income, is generally from the entry & exit load which they charge from an investors, at the time of purchase. The mutual fund industries are thus charging extra cost under layers of jargon.
3. Dilution - Because funds have small holdings across different companies, high returns from a few investments often don't make much difference on the overall return. Dilution is also the result of a successful fund getting too big. When money pours into funds that have had strong success, the manager often has trouble finding a good investment for all the new money.
4. Taxes - when making decisions about your money, fund managers don't consider your personal tax situation. For example, when a fund manager sells a security, a capital-gain tax is triggered, which affects how profitable the individual is from the sale. It might have been more advantageous for the individual to defer the capital gains liability.
Professional Money Management
Fund managers are responsible for implementing a consistent investment strategy that reflects the goals of the fund. Fund managers monitor market and economic trends and analyze securities in order to make informed investment decisions.
Diversification
Diversification is one of the best ways to reduce risk (to understand why, read The need to Diversify). Mutual funds offer investors an opportunity to diversify across assets depending on their investment needs.
Liquidity
Investors can sell their mutual fund units on any business day and receive the current market value on their investments within a short time period (normally three- to five-days).
Affordability
The minimum initial investment for a mutual fund is fairly low for most funds (as low as Rs500 for some schemes).
Convenience
Most private sector funds provide you the convenience of periodic purchase plans, automatic withdrawal plans and the automatic reinvestment of interest and dividends.Mutual funds also provide you with detailed reports and statements that make record-keeping simple. You can easily monitor the performance of your mutual funds simply by reviewing the business pages of most newspapers or by using our Mutual Funds section in Investor’s Mall.
Flexibility and variety
You can pick from conservative, blue-chip stock funds, sectoral funds, funds that aim to provide income with modest growth or those that take big risks in the search for returns. You can even buy balanced funds, or those that combine stocks and bonds in the samefund.
Tax benefits on Investment in Mutual Funds (in India)
1) 100% Income Tax exemption on all Mutual Fund dividends2) Capital Gains Tax to be lower of - 10% on the capital gains without factoring indexation benefit and 20% on the capital gains after factoring indexation benefit.3) Open-end funds with equity exposure of more than 50% are exempt from the payment of dividend tax for a period of 3 years from 1999-2000
Economies of Scale
Mutual fund buy and sell large amounts of securities at a time, thus help to reducing transaction costs, and help to bring down the average cost of the unit for their investors.
Though i didn't want to write this piece ...but let's be fair ..
Disadvantages of Investing Mutual Funds:
1. Professional Management-Some funds doesn’t perform in neither the market, as their management is not dynamic enough to explore the available opportunity in the market, thus many investors debate over whether or not the so-called professionals are any better than mutual fund or investor him self, for picking up stocks.
2. Costs – The biggest source of AMC income, is generally from the entry & exit load which they charge from an investors, at the time of purchase. The mutual fund industries are thus charging extra cost under layers of jargon.
3. Dilution - Because funds have small holdings across different companies, high returns from a few investments often don't make much difference on the overall return. Dilution is also the result of a successful fund getting too big. When money pours into funds that have had strong success, the manager often has trouble finding a good investment for all the new money.
4. Taxes - when making decisions about your money, fund managers don't consider your personal tax situation. For example, when a fund manager sells a security, a capital-gain tax is triggered, which affects how profitable the individual is from the sale. It might have been more advantageous for the individual to defer the capital gains liability.
Mutual Funds simplified
Net Asset Value or NAV
NAV is the total asset value (net of expenses) per unit of the fund and is calculated by the AMC at the end of every business day.
How is NAV calculated?
The value of all the securities in the portfolio in calculated daily. From this, all expenses are deducted and the resultant value divided by the number of units in the fund is the fund’s NAV.
Expense Ratio
AMCs charge an annual fee, or expense ratio that covers administrative expenses, salaries, advertising expenses, brokerage fee, etc. A 1.5% expense ratio means the AMC charges Rs1.50 for every Rs100 in assets under management.A fund's expense ratio is typically to the size of the funds under management and not to the returns earned. Normally, the costs of running a fund grow slower than the growth in the fund size - so, the more assets in the fund, the lower should be its expense ratio.
Load
Some AMCs have sales charges, or loads, on their funds (entry load and/or exit load) to compensate for distribution costs. Funds that can be purchased without a sales charge are called no-load funds.
Open- and Close-Ended Funds
1) Open-ended FundsAt any time during the scheme period, investors can enter and exit the fund scheme (by buying/ selling fund units) at its NAV (net of any load charge). Increasingly, AMCs are issuing mostly open-ended funds.2) Close-Ended FundsRedemption can take place only after the period of the scheme is over. However, close-ended funds are listed on the stock exchanges and investors can buy/ sell units in the secondary market (there is no load).
Important documents
Two key documents that highlight the fund's strategy and performance are 1) the prospectus (legal document) and the shareholder reports (normally quarterly).
Diversification
Diversification is nothing but spreading out your money across available or different types of investments. By choosing to diversify respective investment holdings reduces risk tremendously up to certain extent.
The most basic level of diversification is to buy multiple stocks rather than just one stock. Mutual funds are set up to buy many stocks. Beyond that, you can diversify even more by purchasing different kinds of stocks, then adding bonds, then international, and so on. It could take you weeks to buy all these investments, but if you purchased a few mutual funds you could be done in a few hours because mutual funds automatically diversify in a predetermined category of investments (i.e. - growth companies, emerging or mid size companies, low-grade corporate bonds, etc).
inputs from moneycontrol.com
NAV is the total asset value (net of expenses) per unit of the fund and is calculated by the AMC at the end of every business day.
How is NAV calculated?
The value of all the securities in the portfolio in calculated daily. From this, all expenses are deducted and the resultant value divided by the number of units in the fund is the fund’s NAV.
Expense Ratio
AMCs charge an annual fee, or expense ratio that covers administrative expenses, salaries, advertising expenses, brokerage fee, etc. A 1.5% expense ratio means the AMC charges Rs1.50 for every Rs100 in assets under management.A fund's expense ratio is typically to the size of the funds under management and not to the returns earned. Normally, the costs of running a fund grow slower than the growth in the fund size - so, the more assets in the fund, the lower should be its expense ratio.
Load
Some AMCs have sales charges, or loads, on their funds (entry load and/or exit load) to compensate for distribution costs. Funds that can be purchased without a sales charge are called no-load funds.
Open- and Close-Ended Funds
1) Open-ended FundsAt any time during the scheme period, investors can enter and exit the fund scheme (by buying/ selling fund units) at its NAV (net of any load charge). Increasingly, AMCs are issuing mostly open-ended funds.2) Close-Ended FundsRedemption can take place only after the period of the scheme is over. However, close-ended funds are listed on the stock exchanges and investors can buy/ sell units in the secondary market (there is no load).
Important documents
Two key documents that highlight the fund's strategy and performance are 1) the prospectus (legal document) and the shareholder reports (normally quarterly).
Diversification
Diversification is nothing but spreading out your money across available or different types of investments. By choosing to diversify respective investment holdings reduces risk tremendously up to certain extent.
The most basic level of diversification is to buy multiple stocks rather than just one stock. Mutual funds are set up to buy many stocks. Beyond that, you can diversify even more by purchasing different kinds of stocks, then adding bonds, then international, and so on. It could take you weeks to buy all these investments, but if you purchased a few mutual funds you could be done in a few hours because mutual funds automatically diversify in a predetermined category of investments (i.e. - growth companies, emerging or mid size companies, low-grade corporate bonds, etc).
inputs from moneycontrol.com
Types of Mutual Funds in India
Wide variety of Mutual Fund Schemes exists to cater to the needs such as financial position, risk tolerance and return expectations etc. thus mutual funds has Variety of flavors, Being a collection of many stocks, an investors can go for picking a mutual fund might be easy. There are over hundreds of mutual funds scheme to choose from. It is easier to think of mutual funds in categories, mentioned below.
Overview of existing schemes existed in mutual fund category: BY STRUCTURE
1. Open - Ended Schemes:
An open-end fund is one that is available for subscription all through the year. These do not have a fixed maturity. Investors can conveniently buy and sell units at Net Asset Value ("NAV") related prices. The key feature of open-end schemes is liquidity.
2. Close - Ended Schemes:
A closed-end fund has a stipulated maturity period which generally ranging from 3 to 15 years. The fund is open for subscription only during a specified period. Investors can invest in the scheme at the time of the initial public issue and thereafter they can buy or sell the units of the scheme on the stock exchanges where they are listed. In order to provide an exit route to the investors, some close-ended funds give an option of selling back the units to the Mutual Fund through periodic repurchase at NAV related prices. SEBI Regulations stipulate that at least one of the two exit routes is provided to the investor.
3. Interval Schemes:
Interval Schemes are that scheme, which combines the features of open-ended and close-ended schemes. The units may be traded on the stock exchange or may be open for sale or redemption during pre-determined intervals at NAV related prices.
Overview of existing schemes existed in mutual fund category: BY NATURE
1. Equity fund:
These funds invest a maximum part of their corpus into equities holdings. The structure of the fund may vary different for different schemes and the fund manager’s outlook on different stocks. The Equity Funds are sub-classified depending upon their investment objective, as follows:
Diversified Equity Funds
Mid-Cap Funds
Sector Specific Funds
Tax Savings Funds (ELSS)
Equity investments are meant for a longer time horizon, thus Equity funds rank high on the risk-return matrix.
2. Debt funds:
The objective of these Funds is to invest in debt papers. Government authorities, private companies, banks and financial institutions are some of the major issuers of debt papers. By investing in debt instruments, these funds ensure low risk and provide stable income to the investors. Debt funds are further classified as:
Gilt Funds: Invest their corpus in securities issued by Government, popularly known as Government of India debt papers. These Funds carry zero Default risk but are associated with Interest Rate risk. These schemes are safer as they invest in papers backed by Government.
Income Funds: Invest a major portion into various debt instruments such as bonds, corporate debentures and Government securities.
MIPs: Invests maximum of their total corpus in debt instruments while they take minimum exposure in equities. It gets benefit of both equity and debt market. These scheme ranks slightly high on the risk-return matrix when compared with other debt schemes.
Short Term Plans (STPs): Meant for investment horizon for three to six months. These funds primarily invest in short term papers like Certificate of Deposits (CDs) and Commercial Papers (CPs). Some portion of the corpus is also invested in corporate debentures.
Liquid Funds: Also known as Money Market Schemes, These funds provides easy liquidity and preservation of capital. These schemes invest in short-term instruments like Treasury Bills, inter-bank call money market, CPs and CDs. These funds are meant for short-term cash management of corporate houses and are meant for an investment horizon of 1day to 3 months. These schemes rank low on risk-return matrix and are considered to be the safest amongst all categories of mutual funds.
3. Balanced funds:
As the name suggest they, are a mix of both equity and debt funds. They invest in both equities and fixed income securities, which are in line with pre-defined investment objective of the scheme. These schemes aim to provide investors with the best of both the worlds. Equity part provides growth and the debt part provides stability in returns.
Further the mutual funds can be broadly classified on the basis of investment parameter viz,
Each category of funds is backed by an investment philosophy, which is pre-defined in the objectives of the fund. The investor can align his own investment needs with the funds objective and invest accordingly.
By investment objective:
Growth Schemes:
Growth Schemes are also known as equity schemes. The aim of these schemes is to provide capital appreciation over medium to long term. These schemes normally invest a major part of their fund in equities and are willing to bear short-term decline in value for possible future appreciation.
Income Schemes:Income Schemes are also known as debt schemes. The aim of these schemes is to provide regular and steady income to investors. These schemes generally invest in fixed income securities such as bonds and corporate debentures. Capital appreciation in such schemes may be limited.
Balanced Schemes: Balanced Schemes aim to provide both growth and income by periodically distributing a part of the income and capital gains they earn. These schemes invest in both shares and fixed income securities, in the proportion indicated in their offer documents (normally 50:50).
Money Market Schemes: Money Market Schemes aim to provide easy liquidity, preservation of capital and moderate income. These schemes generally invest in safer, short-term instruments, such as treasury bills, certificates of deposit, commercial paper and inter-bank call money.
Other schemes
Tax Saving Schemes:
Tax-saving schemes offer tax rebates to the investors under tax laws prescribed from time to time. Under Sec.88 of the Income Tax Act, contributions made to any Equity Linked Savings Scheme (ELSS) are eligible for rebate.
Index Schemes:
Index schemes attempt to replicate the performance of a particular index such as the BSE Sensex or the NSE 50. The portfolio of these schemes will consist of only those stocks that constitute the index. The percentage of each stock to the total holding will be identical to the stocks index weightage. And hence, the returns from such schemes would be more or less equivalent to those of the Index.
Sector Specific Schemes:
These are the funds/schemes which invest in the securities of only those sectors or industries as specified in the offer documents. e.g. Pharmaceuticals, Software, Fast Moving Consumer Goods (FMCG), Petroleum stocks, etc. The returns in these funds are dependent on the performance of the respective sectors/industries. While these funds may give higher returns, they are more risky compared to diversified funds. Investors need to keep a watch on the performance of those sectors/industries and must exit at an appropriate time.
inputs from mutualfundsindia.com
Overview of existing schemes existed in mutual fund category: BY STRUCTURE
1. Open - Ended Schemes:
An open-end fund is one that is available for subscription all through the year. These do not have a fixed maturity. Investors can conveniently buy and sell units at Net Asset Value ("NAV") related prices. The key feature of open-end schemes is liquidity.
2. Close - Ended Schemes:
A closed-end fund has a stipulated maturity period which generally ranging from 3 to 15 years. The fund is open for subscription only during a specified period. Investors can invest in the scheme at the time of the initial public issue and thereafter they can buy or sell the units of the scheme on the stock exchanges where they are listed. In order to provide an exit route to the investors, some close-ended funds give an option of selling back the units to the Mutual Fund through periodic repurchase at NAV related prices. SEBI Regulations stipulate that at least one of the two exit routes is provided to the investor.
3. Interval Schemes:
Interval Schemes are that scheme, which combines the features of open-ended and close-ended schemes. The units may be traded on the stock exchange or may be open for sale or redemption during pre-determined intervals at NAV related prices.
Overview of existing schemes existed in mutual fund category: BY NATURE
1. Equity fund:
These funds invest a maximum part of their corpus into equities holdings. The structure of the fund may vary different for different schemes and the fund manager’s outlook on different stocks. The Equity Funds are sub-classified depending upon their investment objective, as follows:
Diversified Equity Funds
Mid-Cap Funds
Sector Specific Funds
Tax Savings Funds (ELSS)
Equity investments are meant for a longer time horizon, thus Equity funds rank high on the risk-return matrix.
2. Debt funds:
The objective of these Funds is to invest in debt papers. Government authorities, private companies, banks and financial institutions are some of the major issuers of debt papers. By investing in debt instruments, these funds ensure low risk and provide stable income to the investors. Debt funds are further classified as:
Gilt Funds: Invest their corpus in securities issued by Government, popularly known as Government of India debt papers. These Funds carry zero Default risk but are associated with Interest Rate risk. These schemes are safer as they invest in papers backed by Government.
Income Funds: Invest a major portion into various debt instruments such as bonds, corporate debentures and Government securities.
MIPs: Invests maximum of their total corpus in debt instruments while they take minimum exposure in equities. It gets benefit of both equity and debt market. These scheme ranks slightly high on the risk-return matrix when compared with other debt schemes.
Short Term Plans (STPs): Meant for investment horizon for three to six months. These funds primarily invest in short term papers like Certificate of Deposits (CDs) and Commercial Papers (CPs). Some portion of the corpus is also invested in corporate debentures.
Liquid Funds: Also known as Money Market Schemes, These funds provides easy liquidity and preservation of capital. These schemes invest in short-term instruments like Treasury Bills, inter-bank call money market, CPs and CDs. These funds are meant for short-term cash management of corporate houses and are meant for an investment horizon of 1day to 3 months. These schemes rank low on risk-return matrix and are considered to be the safest amongst all categories of mutual funds.
3. Balanced funds:
As the name suggest they, are a mix of both equity and debt funds. They invest in both equities and fixed income securities, which are in line with pre-defined investment objective of the scheme. These schemes aim to provide investors with the best of both the worlds. Equity part provides growth and the debt part provides stability in returns.
Further the mutual funds can be broadly classified on the basis of investment parameter viz,
Each category of funds is backed by an investment philosophy, which is pre-defined in the objectives of the fund. The investor can align his own investment needs with the funds objective and invest accordingly.
By investment objective:
Growth Schemes:
Growth Schemes are also known as equity schemes. The aim of these schemes is to provide capital appreciation over medium to long term. These schemes normally invest a major part of their fund in equities and are willing to bear short-term decline in value for possible future appreciation.
Income Schemes:Income Schemes are also known as debt schemes. The aim of these schemes is to provide regular and steady income to investors. These schemes generally invest in fixed income securities such as bonds and corporate debentures. Capital appreciation in such schemes may be limited.
Balanced Schemes: Balanced Schemes aim to provide both growth and income by periodically distributing a part of the income and capital gains they earn. These schemes invest in both shares and fixed income securities, in the proportion indicated in their offer documents (normally 50:50).
Money Market Schemes: Money Market Schemes aim to provide easy liquidity, preservation of capital and moderate income. These schemes generally invest in safer, short-term instruments, such as treasury bills, certificates of deposit, commercial paper and inter-bank call money.
Other schemes
Tax Saving Schemes:
Tax-saving schemes offer tax rebates to the investors under tax laws prescribed from time to time. Under Sec.88 of the Income Tax Act, contributions made to any Equity Linked Savings Scheme (ELSS) are eligible for rebate.
Index Schemes:
Index schemes attempt to replicate the performance of a particular index such as the BSE Sensex or the NSE 50. The portfolio of these schemes will consist of only those stocks that constitute the index. The percentage of each stock to the total holding will be identical to the stocks index weightage. And hence, the returns from such schemes would be more or less equivalent to those of the Index.
Sector Specific Schemes:
These are the funds/schemes which invest in the securities of only those sectors or industries as specified in the offer documents. e.g. Pharmaceuticals, Software, Fast Moving Consumer Goods (FMCG), Petroleum stocks, etc. The returns in these funds are dependent on the performance of the respective sectors/industries. While these funds may give higher returns, they are more risky compared to diversified funds. Investors need to keep a watch on the performance of those sectors/industries and must exit at an appropriate time.
inputs from mutualfundsindia.com
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